The wild ride continues for Arista Networks (NYSE:ANET). After surging some 50% higher in the first half of 2019, shares of the cloud networking provider have reversed course and are down 8% on the year as of this writing. As with everything tech hardware related as of late, investors have been digesting effects from the U.S.-China trade war, a slowing global economy, and a breather in new data center construction after several years of fast expansion from the biggest names in the business.

Adding to the pain was a dismal-looking forecast for the final quarter of 2019. As a result, this stock has gone from high-flyer to something resembling a value in quick fashion. The sell-off looks overdone, though, and now could be the time to start eyeing a purchase of this technology leader.

The future matters more than the past

Recent stock declines are masking a business that is actually doing quite well. With three-quarters of 2019 now in the books, Arista is sitting atop another double-digit advance in spite of widespread weakness in new data center buildout among the "cloud titans" -- namely, Microsoft, Amazon, Alphabet, and Facebook.

Through the third quarter, total sales are up 19% compared with 2018 to $1.86 billion. That includes a 30% rise in Arista's service business to $285 million, which includes software and other network management tools it provides after data center construction is complete. Excluding a one-time legal expense last year, operating costs are up only 8.6% this year, leading to a big 31% surge in adjusted earnings per share.  

ANET Chart

Data by YCharts.

As great as the results have been, though, investors haven't been inclined to treat Arista as the high-growth tech play it is. As previously mentioned, various headwinds have conspired against the company; but the latest is the fourth-quarter 2019 outlook. Revenue of $540 to $560 million is expected, good for an 8% year-over-year decline at the midpoint of guidance.

While no specific numbers were stated yet, Arista is also forecasting a flat-to-slightly-down year for revenue from its largest cloud customers in 2020. While a pause in spending from Microsoft in the second quarter earlier this year caused some hiccups, a sharp decline in investment from another cloud titan (presumably Facebook this time) is what's accounting for the sluggish initial outlook for the next year. Also affecting guidance is management's expectation that new 400G networking hardware initial deliveries are going to be delayed until the second half of 2020, with mainstream production occurring in 2021 (versus initial deliveries starting during Q4 2019).  

An illustration of a cloud, representing a data center, surrounded by a bank of computers.

Image source: Getty Images.

Nothing great is built in a single year

The news may look glum, but here's the upside: Arista is well diversified, and other areas of the business are performing well. Cloud titans will continue to spend over time as they build out new capabilities and upgrade their technology, and in the meantime a new segment of smaller on-campus data center customers is growing fast. Q3 was the new campus cloud's first full quarter of operation, and CEO Jayshree Ullal said it's already on track for $100 million in annual shipments. Ullal elaborated that half of the on-campus builds came from new customers, a pleasant surprise as most sales were expected to come from existing customers.  

Put simply, the long-term trend toward greater computing needs and increasing internet traffic is still in place. A single year, let alone one quarter, of melancholic numbers isn't going to derail Arista. In the meantime, the beaten-down stock is trading for 20.6 times trailing 12-month earnings, or 17.3 times trailing 12-month free cash flow (money left after cash operating costs and capital expenditures). That compares with a trailing 12-month price-to-earnings ratio of 23.5 for the S&P 500.

If you think Arista is going to get stuck in a long-term downtrend on the top line, it's time to move on. However, if you think the internet and cloud computing will continue to be an important part of the global economy, this small tech company with no debt, a history of delivering double-digit sales and profit growth, and a below-average valuation is a great long-term value. I, for my part, am a buyer of Arista Networks right now.