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How Long Can Arista Keep Growing This Fast?

By Dan Caplinger – Jul 20, 2016 at 12:46PM

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The cloud computing specialist is taking full advantage of strong conditions while the getting is good.


An example of Arista's EOS process. Image source: Arista Networks.

Cloud computing is one of the fastest-growing areas of technology, and Arista Networks (ANET -1.04%) has staked its claim to the high-growth niche. Stock prices among cloud computing specialists have grown volatile lately, as investors try to figure out how much endurance the bullish move in the niche has going forward. Coming into its second-quarter financial report on Aug. 4, Arista shareholders have become more optimistic about the staying power that Arista has, and they're hoping that past growth rates will continue well into the future. Let's take an early look at Arista Networks to see if it is likely to give investors good news in its financial report.

Stats on Arista Networks

Expected EPS Growth

26%

Expected Revenue Growth

35%

Trailing Earnings Multiple

21.8

Expected 5-Year Annualized Growth Rate

22.6%

Data source: Yahoo! Finance.

Will growth rates for Arista Networks earnings stay high?

In recent months, investors have continued to become even more enthusiastic about the growth prospect for Arista Network earnings, boosting their second-quarter expectations by $0.04 per share and making roughly 5% increases to their full-year 2016 and 2017 projections. The stock has continued to recover from declines early in the year, with gains of 12% since mid-April.

Arista Networks' first-quarter results reassured investors who had become fearful about less successful performance from some of the company's cloud computing peers. Revenue soared 35%, and adjusted net income grew at a 38% pace, easily exceeding what most of those following the stock had expected to see. Both the product and services segments enjoyed healthy growth rates, and the guidance that Arista gave for the second quarter confirmed that the cloud computing company didn't see any near-term slowdown in its financial prospects. The introduction of new products also gave Arista even more potential to stay on its high-growth trajectory into the future.

Arista deals with challenges as it seeks to execute on opportunities

That said, not everything went Arista's way during the quarter. In June, the company suffered a negative ruling from the International Trade Commission, which had been adjudicating a legal dispute with rival Cisco Systems. The dispute involves whether Arista violated certain Cisco patents in developing some of its products, and the ruling issued a cease and desist order on three patents. Arista said it would comply with the order, but it still believes that Cisco's position "would have a chilling effect on innovation" if it's upheld. Arista has found workarounds that it believes will comply with the commission's findings while ensuring continued access to product features for Arista customers.

Looking forward, Arista is working hard to gain market share. Analysts believe that Arista's competitive position in the router market will allow it to eat into business that rival Juniper Networks has had in recent years. As Arista products gain greater acceptance in key designs, it could see further success in coaxing customers away from existing providers and having their needs fulfilled by Arista.

One key question is how much of a competitive advantage Arista can generate from its more flexible approach to providing solutions. One reason why some customers like Arista products is that they don't have to use a single brand of equipment in order to take advantage of Arista's features. By using third-party chips, Arista can keep its own development costs low and rely instead on outside providers to do some of the legwork in working on the materials that eventually go into Arista products. Along with the cloud-friendly Extensive Operating System that is Arista's hallmark achievement, the company has done a good job of delivering workable solutions to its clients.

In Arista Networks' quarterly report, investors should look at whether the company is still firing on all cylinders as it seeks to maximize its market share in its key specialty areas. With cloud computing still in its ascendancy, Arista has a golden opportunity to sustain strong growth well into the future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool recommends Cisco Systems. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Arista Networks Stock Quote
Arista Networks
ANET
$135.76 (-1.04%) $-1.43

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