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Why Arista Networks Was Down 14% in February

By Jon Quast - Mar 3, 2020 at 10:05AM

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Investors didn't like the company's 2020 guidance -- and that was before the euphoric bull market hit a wall.

What happened

Shares of Arista Networks (ANET 2.08%) fell 13.5% in February, according to data provided by S&P Global Market Intelligence. About half of this drop happened during the last week of the month, as the market indexes had their fastest 10% drop in history. Almost all stocks were caught up in the current, Arista Networks included.

But the other half of Arista Networks's drop came on Feb. 14 after it reported full-year 2019 results, which ended with declining revenue. The network company additionally provided guidance for 2020, or perhaps I should say lack of guidance. While management had some thoughts on the future, it said it wasn't able to provide specific guidance for the entire year ahead.

Man places head on table in frustration, with a crashing stock chart in the background.

Image source: Getty Images.

So what

Arista Networks revealed its fourth-quarter revenue declined both 7% annually and 16% sequentially. Its product segment revenue was particularly weak, falling 11% year over year to $447 million. The company is reliant on spending from cloud giants like Facebook and Microsoft as they upgrade and expand their network capabilities. But that spending has slowed, at least for the moment.

For the upcoming first quarter, Arista Networks is guiding for revenue of $522 million to $532 million. At the midpoint, that's an 11% decline from $595 million in first-quarter 2019 revenue. And that's as far as the revenue guidance goes for 2020. Management said it expects the year to be a continued challenge, with revenue either flat or declining.

Finally, Arista Network's stock got caught up in the COVID-19-related selling to end February. That's probably irrational, since the coronavirus fallout is more related to consumer goods and manufacturing than network spending. 

Now what

While the coronavirus isn't likely to impact Arista Networks's business, investor concern over declining revenue is completely warranted. Fortunately, even with declining revenue, the company is still profitable. Q4 net income rose an impressive 53% year over year to $261 million. Strong profitability and a pristine balance sheet mean this company can weather the current storm it's in.

While investors should look beyond the current quarter or year, there doesn't seem to be much to look forward to in 2020. Lacking a clear catalyst moving forward, it may be worthwhile to wait and see how full-year 2020 guidance develops next quarter. 

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