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Why Arista Networks Fell 17.1% in August

By Steve Symington – Sep 11, 2019 at 9:20AM

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The cloud-networking leader warned of potentially slower growth later this year. Here's what investors need to know.

What happened

Shares of Arista Networks (ANET 4.30%) declined 17.1% in August, according to data from S&P Global Market Intelligence, after the cloud-networking solutions specialist announced strong second-quarter results but followed with cautious comments on growth for the rest of the year.

To be sure, Arista stock dropped more than 10% on August 2, 2019 alone -- the first trading day after the company told investors its Q2 revenue had climbed 17% year over year to $608.3 million, translating to adjusted net income of $198.6 million, or $2.44 per share. Analysts, on average, were modeling earnings of $2.20 per share on revenue closer to $607 million.

Grey stock market chart with yellow arrow line indicating losses.

Image source: Getty Images.

So what

Arista CEO Jayshree Ullal praised the company's ability to drive profitable growth, with particular strength in the enterprise vertical more than offsetting some weakness from certain cloud clients. Ullal also noted that Arista Networks' "leadership in cloud-area networking is now widely recognized by industry analysts, partners and customers."

So why the decline? During the subsequent conference call, Arista CFO Ita Brennan elaborated:

As expected, we experienced some softness in demand from our cloud customers in the second quarter. While early indications are for improved demand from these customers in the September period, we believe that second-half growth in this business will remain somewhat muted as compared to prior years. We expect our enterprise and financial verticals to continue to perform well, offset by some declines in the service provider business.

Now what

In the meantime, Arista is targeting third-quarter revenue of $647 million to $657 million -- the midpoint of which is slightly above consensus estimates for $651 million at the time -- with adjusted gross margin remaining between 63% and 65% (compared to 64.7% in Q2).

That helps explain why shares initially turned higher in after-hours trading after Arista's report hit the wires. But given those words of caution from management about growth potentially slowing later this year, unless Arista steps out to negate those concerns, I suspect the stock will remain under pressure for now.

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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