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Why Arista Networks Inc. Stock Plunged Today

By Steve Symington – Feb 16, 2018 at 2:21PM

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The cloud-based networking leader fell despite its strong quarterly results. Here's what investors need to know.

What happened

Shares of Arista Networks Inc. (ANET -2.29%) were down 17.8% as of 1 p.m. EST Friday, after the cloud-based networking specialist announced strong fourth-quarter 2017 results but followed with cautious comments on its full-year growth.

Arista's quarterly revenue climbed 42.7% year over year to $467.9 million. That translated to adjusted gross margin of 65.9% and adjusted net income of $137.3 million, or $1.71 per share. By comparison, Arista's most recent financial guidance called for revenue between $450 million and $464 million, and adjusted gross margin in the range of 63% to 65%. And analysts were only expecting adjusted earnings of $1.41 per share.

Arista Networks switching hardware


So what

CEO Jayshree Ullal called 2017 a "tipping point," noting the company's "disruptive software-driven architecture" has enabled Arista to exceed 15 million cumulative cloud-networking ports.

In addition, Arista told investors to expect first-quarter 2018 revenue of between $450 million and $468 million -- roughly in line with consensus expectations -- while echoing last quarter's guidance for adjusted gross margin of 63% to 65%.

During the subsequent conference call, however, CFO Ita Brennan cautioned that while "demand drivers for the business remain strong," Arista Networks will face "tough comparables" with last year's stellar growth as it progresses further into 2018. 

"With this in mind," Brennan added, "I would reiterate Jayshree's comments from last quarter with respect to top-line growth moderating to a more typical mid-20s for the year."

Now what

To be fair, it shouldn't be shocking that growth will moderate as Arista builds from its larger base. And as Brennan noted, the company had already warned investors about it during last quarter's call.

If we read the "typical mid-20s" outlook to mean 25%, consensus estimates were technically more aggressive in predicting 27.4% top-line growth for all of 2018.

Of course, investors should also keep in mind that Arista Networks has made a habit of underpromising and overdelivering, so I won't be surprised if this outlook proves conservative when 2018 is said and done. But it also didn't help that Arista Networks' stock price had more than tripled over the past year leading up to this report, likely tempting some skittish investors to take profits despite the continued relative strength of Arista's underlying business.

In the end, there's no disputing that this was another strong report from Arista Networks. And contrary to what today's decline might indicate, I think long-term investors should be more than pleased with its position.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.

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