Arista Networks (ANET -1.66%) will soon be entering into the cybersecurity market. This week, it announced its intention to acquire the network security specialist Aware Security. Here's what that means for the cloud network vendor.
From cloud networking to cybersecurity
Investors may be surprised by Arista's acquisition outside of its core networking business, but that move makes sense.
Over the last 10 years, Arista took advantage of the difficulties the legacy network vendors Cisco Systems and Juniper Networks have been facing to adapt to cloud computing. Its innovative cloud networking solutions offered the scale, flexibility, and performance cloud giants demanded to build their huge data centers.
Then, the company leveraged its technology to expand into the campus (enterprise local networks) arena. It also enhanced its offerings with acquisitions. For instance, it acquired Mojo Networks in 2018 to propose Wi-Fi solutions.
As a result, Arista generated strong revenue growth from $1.1 billion in 2016 to $2.3 billion over the last 12 months.
Yet the company doesn't address all networking areas. For example, it lacks SD-WAN capabilities to allow enterprises' remote locations to optimize their network access to resources via private networks or the internet.
But the decision to diversify its portfolio into cybersecurity remains a logical choice for the network vendor as integrated networking and cybersecurity technologies generate significant cross-selling opportunities. That's why Cisco and Juniper have been proposing cybersecurity solutions for many years.
Moreover, global cybersecurity represents an attractive market that should grow at an annual compound rate (CAGR) of 10% to $326.4 billion by 2027, according to the research specialist Grand View Research.
Leveraging network security
With its network detection and response (NDR) capabilities, Aware Security addresses only a small part of that huge cybersecurity market. But synergies with Arista's portfolio should remain appealing as Aware Security's platform analyzes network traffic and interacts with network infrastructures such as Arista's to deals with threats.
Management will provide more details about its strategy during a webinar on Oct. 15. But most likely, Arista's and Aware Security's technologies will be tightly integrated. And Aware Security could still be marketed as an independent platform, too.
Besides, Arista CEO Jayshree Ullal described Aware Security's solution as "disruptive" as it leverages artificial intelligence (AI) and machine learning (ML) capabilities, which looks promising.
However, the security vendor is facing intense competition. A recent report from the research specialist Gartner described the NDR market as "crowded with a low barrier to entry", and it listed 16 solutions that compete against Aware Security's platform with similar technologies. Also, some of those competitors offer some significant integration opportunities. For instance, Cisco can complement its NDR product Stealthwatch with its vast networking and cybersecurity portfolio.
Expanding cybersecurity portfolio
Even if Aware Security's platform addresses a crowded market, the acquisition positions Arista as a cybersecurity vendor that is poised to keep expanding its offerings to take advantage of cross-selling opportunities with its portfolio. And the tech stock has the resources to pursue that goal.
The terms of the transaction weren't disclosed, which means the deal is likely to remain modest relative to Arista's scale.
According to Crunchbase, Awake raised nearly $80 million since its creation in 2014. In comparison, Arista accumulated a much larger safety net of $2.8 billion of cash, cash equivalents, and marketable securities (and no debt) at the end of the last quarter.
In addition, its operating margin remained elevated at 30.1% in the second quarter, thanks to its low sales and marketing expenses as a percentage of revenue driven by its large cloud customers. That leaves the company with some significant dry powder to proceed with extra acquisitions.
Thus, looking forward, investors should expect Arista to keep expanding its portfolio into the cybersecurity market given the attractive opportunities this new market represents for the network vendor.