Arista's stock falls as investors don't get the 'near perfect' earnings desired

By Emily Bary

Analysts noted a lack of upside to revenue forecasts

Arista Networks Inc. perhaps needed a "near perfect" earnings report to meet Wall Street's standards given its "near peak valuation," according to a Piper Sandler analyst.

Yet Arista shares (ANET) pulled back about 7% in Thursday's extended session as the networking giant merely met expectations with its latest revenue and top-line outlook, even as it easily topped profit expectations.

"While margins are amazingly strong, timing of shipments, which we estimate at [greater than] $100 million, led to some reported disappointment," Piper's James Fish wrote in a note to clients.

As some recognized revenue is to be pushed out into the current quarter, he added that the first-quarter outlook, which was in line with expectations on paper, could be seen as actually weaker than anticipated as the consensus didn't factor in the push-outs.

The networking giant projects $1.52 billion to $1.56 billion in revenue for the ongoing quarter, while analysts tracked by FactSet were modeling $1.53 billion on the top line.

Arista executives also foresee a 62% gross margin, while the consensus view implied expectations for a 63% gross margin.

For the full year, management reiterated a target for 10% to 12% revenue growth.

"Many may look at the 2024 overall guide being reiterated as conservative, but we view it as prudent given the cyclicality of the space, uncertainty with AI Ethernet shipments, & introduction of a new CFO," Fish wrote, while maintaining a neutral rating on the stock.

Evercore ISI's Amit Daryanani wrote that "the lack of revenue upside" was likely driving the stock's move lower in the aftermarket, though he said the company "remains well-positioned to sustain high teens top-line growth over the next several years" and to most likely "do so with a better end-market diversity vs. what we have historically seen."

Daryanani added that "AI opportunity continues to look like a sizable upside lever" as he keyed in on management commentary indicating that Arista won four out of five bids that it took part in, "with the one they lost staying within InfiniBand fabric."

In the fourth quarter, Arista logged net income of $613.6 million, or $1.92 a share, compared with net income of $427.1 million, or $1.35 a share, in the year-prior period. On an adjusted basis, Arista posted earnings per share of $2.08, up from $1.41 a year before and above the $2.08 FactSet consensus.

Revenue came in at $1.54 billion, up about 2% from a year earlier. Analysts had been looking for $1.53 billion.

"We are cautiously optimistic about achieving our AI revenue goal of at least $750 million in AI networking in 2025," Chief Executive Jayshree Ullal said on the earnings call.

Arista's stock has gained 36% over a three-month span and 111% over a 12-month period.

Networking rival Cisco Systems Inc. (CSCO) posts quarterly results Wednesday afternoon.

-Emily Bary

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02-12-24 2116ET

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