Why Shares of Arista Networks Tumbled Today

A sudden slowdown in cloud demand led to surprisingly weak guidance.

Timothy Green
Timothy Green
May 3, 2019 at 1:09PM
Technology and Telecom

What happened

Shares of Arista Networks (NYSE:ANET) declined on Friday following the software-driven networking company's first-quarter results. Revenue was in line with analyst estimates, and earnings were better than expected, but the company's second-quarter guidance came up short. The stock was down about 14.6% at 12:00 p.m. EDT.

So what

Arista reported first-quarter revenue of $595.4 million, up 26% year over year and flat compared to the fourth quarter of 2018. Non-GAAP (generally accepted accounting principles) earnings per share came in at $2.31, up from $1.66 in the prior-year period and $0.24 higher than analysts were expecting.

A declining chart.

Image source: Getty Images.

The company's second-quarter guidance wasn't as impressive. Arista expects second-quarter revenue of `between $600 million and $610 million, up 16.4% year over year and well short of the $639.3 million analysts were expecting.

The weak guidance was driven by a shortfall in demand toward the end of the first quarter from the company's service provider and cloud verticals. Arista's guidance assumes this trend continues into the second quarter.

Now what

Arista CEO Jayshree Ullal described the issue that cropped up toward the end of the first quarter during the earnings call, while assuring investors that it's a short-term problem: "We experienced a sudden change in mid-March and a sudden slowdown in orders, especially from the cloud titans. ... So I wouldn't read anything into this six weeks except, as I said, especially one cloud titan specifically slowed down and paused most orders in Q2."

With shares of Arista valued at more than 11 times annual sales and around 80 times GAAP earnings prior to the report, there was no room for error. A growth slowdown, even if it is temporary, has spooked investors.