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Why Arista Networks Stock Dropped 21.7% in May

By Steve Symington – Jun 6, 2019 at 9:02AM

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Forward guidance from the software-centric networking leader left investors wanting more. Here's what happened.

What happened

Shares of Arista Networks (ANET -0.27%) fell 21.7% in May, according to data from S&P Global Market Intelligence, after the networking products company announced solid first-quarter 2019 results but followed with underwhelming forward guidance.

To be sure, Arista stock dropped more than 10% on May 3, 2019 alone even after the company revealed its quarterly revenue grew 26% year over year, to $595.4 million -- near the high end of guidance provided in February for a range of $588 million to $598 million. That translated to adjusted net income of $187.7 million, or $2.31 per share, up from $1.66 a year earlier and well above the $2.07 per share most analysts were modeling.

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So what

Arista CEO Jayshree Ullal lauded its "consistent execution and profitability" even in the seasonally slow quarter, adding that the company is "witnessing the deployment of cloud principles into new enterprise markets."

CFO Ita Brennan elaborated, "Our Q1 financial performance demonstrates the robustness of the business model with record earnings as we continue to diversify the business."

What's more, perhaps in a move to take advantage of the market's negative reaction to guidance (more on that below), Arista's board authorized a $1 billion share repurchase program set to expire in April 2022.

Now what

Looking ahead to the second quarter of 2019, Arista told investors to expect revenue between $600 million and $610 million, good for decelerated year-over-year growth of 15% to 17% and well below Wall Street's $640 million target at the time.

During the subsequent conference call, Ullal acknowledged this light near-term outlook, describing it as "somewhat of a speed bump" as "one massive cloud titan has placed most orders on hold" for the second quarter.

Still, she appeared to indicate this would be a temporary pause, adding that new product introductions in the second half should lead to an "uptick in demand."

Until that happens, however, don't be surprised if Arista's share price remains under pressure as the market approaches its more modest top-line growth with caution.

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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