After Earnings, Is Arista Stock a Buy, a Sell, or Fairly Valued?

Arista Networks ANET released its first-quarter earnings report on May 7. Here’s Morningstar’s take on Arista’s earnings and stock.

Key Morningstar Metrics for Arista Networks

• Fair Value Estimate: $270.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Arista Networks’ Q1 Earnings

• We significantly raised our valuation to $270 per share from $195 due to a bullish long-term forecast for generative artificial intelligence, which we think will benefit Arista as the best-of-breed provider of high-speed Ethernet networking equipment. Shares have been up throughout the week, and we still see them as a bit overvalued.
• Arista’s results were positive. The firm beat guidance and raised its full-year outlook. It continues to win share across enterprise networking and is seeing strong growth in cloud data centers.

Fair Value Estimate for Arista Networks Stock

With its 3-star rating, we believe Arista stock is fairly valued compared with our long-term fair value estimate of $270 per share. Our valuation implies a 2024 enterprise value to sales multiple of 12 times and a 2024 adjusted price/earnings multiple of 33 times. The greatest drivers to our valuation are growth in high-speed data center switching a broad-based market share gains.

We forecast 17% compound annual sales growth through 2028 for Arista. Data centers are the biggest contributor to sales over our forecast, and we model an 18% compound annual growth rate. We expect these sales to increase faster than the market, with continued share gains. We expect significant gains for Arista’s campus portfolio as well, with the firm’s revenue here increasing 20% annually through 2028 in our model and eclipsing management’s $750 million goal in 2025. We think heightened product development and go-to-market investment will be key to Arista’s penetration of these markets.

Read more about Arista’s fair value estimate.

Economic Moat Rating

We assign Arista a wide moat based on intangible assets in high-speed networking and customer switching costs. We view Arista’s high-speed switches and software-led approach as significantly differentiated from other networking competitors and difficult to replicate. We expect the firm’s strength in high-speed switching to generate economic profits over the next 20 years.

We believe Arista’s networking switches are best of breed, resulting from a software-led approach over its networking hardware. The firm’s specialty is high-speed switches (those with speeds of 100 gigabits or more) designed for data centers. These switches create a local network to connect to a wider network and the internet. Data traffic continues to explode, increasing the need for Arista’s gear, in our view.

Read more about Arista’s moat rating.

Financial Strength

We view Arista’s balance sheet and cash flow generation as very strong. We expect it to focus its cash flows on organic investment first, followed by bolt-on M&A and opportunistic repurchases. Arista had a net cash position of $5 billion as of Dec. 31, 2023, with no debt on its balance sheet. It has consistently covered its obligations and organic needs with strong free cash flow.

Read more about Arista’s financial strength.

Risk and Uncertainty

We assign Arista a High Uncertainty Rating. Its sales are concentrated in the cloud networking market, which can exhibit cyclicality and lumpy customer spending patterns. This lumpiness can be exacerbated by Arista’s concentration in customers like Microsoft MSFT and Meta Platforms META. Softer spending patterns from these customers can cause top-line performance to suffer, as seen in 2019 and 2020 when Meta skipped an upgrade cycle.

Read more about Arista’s risk and uncertainty.

ANET Bulls Say

• Arista has a top market position in high-speed switching and continues gaining shares.
• Arista holds best-in-class profit margins and earns robust profits, reflecting its strong value proposition and wide moat.
• Arista earns heady free cash flow, which it can use for organic investment and shareholder returns.

ANET Bears Say

• Arista has a weaker position in networking outside high-speed switching, and it may struggle to expand into adjacent markets.
• We see heightened investment and competition from Cisco in Arista’s core high-speed market, which may make growth and market share gains more difficult.
• Arista’s acquisition history is small and new, and it could risk destroying shareholder value with ill-advised deals.

This article was compiled by Sokhoeun Noeut.