Arista Networks (ANET 0.34%) has become a profitable and robust enterprise by providing cloud networking software and hardware for data centers -- including huge ones operated by some of the internet's largest companies. But when a business has a small number of clients responsible for a large share of its revenue, it's extra vulnerable to those customers' spending choices. E-commerce niche player Etsy (ETSY 0.55%), by contrast, relies on an enormous array of sellers and buyers.
In this segment of the Nov. 1 Motley Fool Money podcast, host Chris Hill and Motley Fool senior analysts Andy Cross, Jason Moser, and Ron Gross discuss why usually fast-growing Arista now expects revenues to drop next quarter, and what it means, and why Etsy's shares sank in the wake of an apparently strong earnings report.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Nov. 1, 2019.
Chris Hill: Arista Networkstook a page out of Wayfair's playbook. Third-quarter results came with fourth-quarter guidance that was well below expectations. Shares of Arista down big, Andy.
Andy Cross: Yeah, tough day. Many of our members and listeners own Arista, I'm sure. It's a popular stock here at The Motley Fool. Not to bury the lede, the real story here is, Arista, which provides cloud networking for data centers, software and hardware for data centers, big clients, including Facebook and Microsoft, cloud titans -- well, one of these cloud titans looks like it is now changing its spending habits for the fourth quarter, and, importantly, into 2020. These are large, meaningful, north of 10% revenue for Arista. That really has gotten some investors spooked. When you look at the profits, Arista is very profitable. It's been able to grow very handsomely over the last five years. But now, they really are expecting a drop in the fourth quarter in revenues. For a company that has steadily put up very handsome, north of 25% growth rates, that's sent a shock to the system, and investors are selling the stock off this week.
Hill: Etsy's third quarter results didn't look that bad, Jason, but shares of the online retailer fell more than 20% this week. Was it that bad?
Jason Moser: No. [laughs]
Hill: [laughs] So, investors got it wrong?
Moser: This is like your wife making you sleep on the couch for making tater tots instead of mashed potatoes. I mean, it's a total overreaction!
Ron Gross: [laughs] Has that ever happened?
Hill: Apparently it has.
Moser: It never happened to me, but I could just imagine. I feel like, with Etsy --
Hill: I'm sorry, that was an oddly specific example, so forgive me if I don't believe that hasn't happened. [laughs]
Moser: I'm not going to go any further on that. Let's talk about Etsy. [laughs]
Hill: [laughs] Let's move on!
Moser: We talked about Wayfair, and the top line story being such a difficult one with Etsy, there are fundamentals in play here. This is a company that makes money and cash and all that good stuff. Gross merchandise sales were up 30%. Revenue up 31.5%. Sellers up 27%. Buyers, 21%. They're growing mobile share. I think the only thing in the call that really stood out to me, and maybe the market's parsing a little bit of that Reverb data in regard to the revised guidance, maybe they were expecting a little bit more from the core Etsy business itself. Maybe part of it has to do with the take rate, the revenue that Etsy is making on the total gross merchandise sales. That blended rate's going to come down a little bit with that Reverb acquisition. But that's also opportunity.
So, for me, this really was a short-sighted reaction. It's nice to see the market is giving it a little bit of credit today. It's coming back a little bit. But, yeah, this to me stood out as a big overreaction in virtually every way.
Cross: Active sellers up almost 27%. Active buyers up 21%. They pulled in the profit margin guidance for the quarter, to Jason's point about maybe not taking as much on the profit side. That seemed to really send some fear into the investing marketplace. Chris, as you and I talked about this week, that really made me think more of a buying opportunity.
Moser: I'm already doing some Christmas shopping on Reverb. That is a fun site to look around on if you have any musical inclinations.
Hill: When you look at shares of Etsy, they're roughly where they were a year ago. To your point, Jason, we're going into the holiday quarter. It seems like, if this is a stock you've had on your watch list for a while, this might be the time to pull the trigger. If they come up with a halfway decent holiday quarter, you have to believe shares are going to pop.
Moser: They very well may. I do agree with your point on the buying opportunity. I said as much this week. To me, this is a very well-run business with very strong leadership in Josh Silverman. I just expect big things. I own shares personally and have no intentions of cutting them loose anytime soon.
