What happened
Shares of Arista Networks (ANET -1.15%) declined 20.2% in November, according to data from S&P Global Market Intelligence, after the networking technology specialist announced strong third-quarter 2019 results, but warned of weakness in the coming quarter related to a single "cloud titan customer."
Virtually all of the stock's plunge last month came on Nov. 1 alone, immediately after Arista's quarterly update was released.
Image source: Getty Images.
So what
Arista's third-quarter performance was as solid as any investor could have hoped for; revenue climbed 16.2% year over year to $654.4 million, including 14.3% growth in product revenue (to $555.1 million) and a 27.7% increase in service revenue to $99.3 million. On the bottom line, that translated to non-GAAP (adjusted) net income of $217.1 million, or $2.69 per share, up 27.5% from $2.11 per share in the year-ago period.
"In Q3 we continued to see adoption of our cloud networking technology in more diverse environments," CEO Jayshree Ullal said.
Now what
But Ullal also added, "While we expect a sudden softening in Q4 with a specific cloud titan customer, we are committed to a sustainable and strong foundation of long-term growth, innovation, and profitability."
More specifically, Arista anticipates fourth-quarter revenue between $540 million and $560 million -- down from $595.7 million a year earlier, and far below analysts' consensus estimates at the time of last month's update for revenue closer to $686 million.
That "cloud titan customer" is widely believed to be Facebook (META -3.23%). The social media giant is one of only two companies -- the other being Microsoft (MSFT -1.51%) -- that's expected to represent more than 10% of Arista's total revenue this year, and Arista says it was surprised this quarter by the customer's "dramatic reduction" in its spending forecasts for the end of the year.
During the subsequent conference call, CFO Ita Brennan insisted this doesn't indicate Arista is losing market share to larger competitors like Cisco (CSCO -0.52%), as some investors fear. But she also admitted it will mean demand in Arista's cloud business will likely be "flat to down on a year-over-year basis for the remainder of 2019 and into 2020."
In the end, this could prove to be a compelling chance for opportunistic investors to add this top stock at a relative discount to its long-term potential. But it's no surprise that Arista shares fell hard last month as the market absorbed the news.
