Arista Networks: Excellent Growth and Fundamentals

Arista Networks (ANET) is a computer networking company based in California.

The company is engaged in the development, marketing, and sale of cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. Arista Networks was incorporated in 2004, and is headquartered in Santa Clara, California.

I am neutral on ANET stock. The cloud computing company has several strengths, such as profitability and growth, delivering a robust Q4 2021 earnings report.

Q4, Full-Year 2021 Results

ANET stock earnings have been trending up steadily as of Q1 2020. On top of that, the firm has an impressive track record of beating EPS estimates in the past eight consecutive quarters. In Q4 2021, normalized EPS of $0.82 was a beat by $0.09, GAAP EPS of $0.75 was a beat by $0.11, and revenue of $824.46 million was a beat by $33.75 million.

The latest quarterly financial highlights included a year-over-year increase of 27.1% for revenue, GAAP gross margin of 63.4% that marginally declined from 63.9% in the fourth quarter of 2020, and GAAP net income of $239.3 million, compared to GAAP net income of $183.0 million.

The full-year 2021 financial results were also very positive reflecting strong growth in revenue and EPS. Revenue of $2.95 billion showed a significant increase of 27.2% compared to Fiscal Year 2020, GAAP gross margin of 63.8% was marginally lower than GAAP gross margin of 63.9%, and GAAP net income of $840.9 million increased 32.5% compared to GAAP net income of $634.6 million.

Arista Networks estimates Q1 2022 revenue to be $840 million to $860 million, a non-GAAP gross margin of 63% to 64%, and a non-GAAP operating margin of approximately 38%.

Fundamentals – Risks

There are not any severe risks for Arista Networks. The company has a very strong balance sheet with a D/E ratio of 0.01 as per the latest quarter.

The stability of its gross margin is exceptional. For the period 2017-21, gross margin was within a range of 63.8%-64.5%. In FY 2021, the operating margin increased to 31.4% from 30.2% in FY 2020, and the net margin widened to 28.52% from 27.38%.

The liquidity is great with both current and quick ratios well above the benchmark value of 1.0. In FY 2021, the firm generated $951.12 million of free cash flow, representing an increase of 32.15%.

Arista Networks excels also at growth. The 10-year average growth for revenue, operating income, net income, and EPS is 35.64%, 35.48%, 37.81%, and 32.52%, respectively.

Wall Street’s Take

Arista Networks has a Moderate Buy consensus based on 11 Buys and seven Holds. The average Arista Networks price target of $151.43 represents 23.6% upside potential.

Conclusion

Arista Networks has excellent growth, profitability, and free cash flow generation; core elements of a high-quality and top effective business plan.

The only reason for concern is the rich valuation.

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