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Arista Networks - Long-Term Potentials

Updated: Mar 22, 2021

Arista Networks is a California Based software firm, that is involved in the sale of a data centre operating system, coined the 'Extensible Operating System'. Furthermore the firm also develops industry level ethernet switches. Although these sound like 'boring', 'tech-savvy' and 'useless' products, they are in fact changing industries worldwide, playing a massive role in the high-frequency trading environment in the early 2010s and currently driving the cloud-computing boom with Facebook and Microsoft Azure as its major customers. The company is led by Jayshree Ullal, a seasoned veteran with experience from Cisco and AMD in the past. She is also one of the board of directors at Snowflake.

The reason why this stock caught my attention was definitely because of the momentum it has built over the last few years. Revenue has doubled between 2016-2019 while the earnings have increased more than 4 fold. This revenue growth is about the same as during their 2016-19 operation. I was a bit skeptical at the beginning, especially with the rise in inorganic growth practices by other technology companies. However, goodwill has barely changed in the Arista balance sheet, suggesting organic growth from the parent company.

The PE ratio of 35, in my opinion is driven quite high due to falling interest rates. Furthermore, throughout January 2021 insiders have sold their stock. Additionally, in the 2019 annual report the management discusses the fall in demand from large customers a primary problem from the company, especially since a large portion of the firm's sales are built upon returning large customers.

In conclusion, I believe that Arista Networks is a well managed company with strong long-term growth potential. If an investor wants to buy stock in the company, I recommend waiting for the quarter earnings to observe the short term reaction of the stock price, current data may suggest a slowdown in growth for the upcoming quarter.

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