Arista Networks (ANET 1.43%) has had a rough few years, but over the past year, the stock has popped by nearly 90%. In this segment of Backstage Pass, recorded on Dec. 1, Fool contributors Brian Feroldi and Brian Withers discuss whether this tech stock is one for long-term investors to consider right now.
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Brian Feroldi: Moving onto Arista Networks, ticker symbol ANET. Arista had a rough 2020 and even tough 2019. A few of its biggest customers hit pause on their spending and that caused the company's hypergrowth to really slow down. More recently the chip shortage has been a big problem for this company but it's growing pretty well despite that.
In the most recent quarter, revenue grew 24% to $749 million. This figure exceeded the high-end of management's guidance. They also called out that they were growing in all of their verticals. Good to see. Sales in the U.S. were 75% of the total, international obviously then 25% so doing good in international markets too.
Adjusted gross margin was up 30 basis points to almost 65%. That's pretty impressive given the challenges in the supply chain. Expenses were up basically everywhere however, not as fast as revenue. As a result, adjusted net income still grew 33% to $224 million or $2.81 per share.
Management called out that the supply chain environment is still very hectic in that lead times have increased, input costs have increased. As a result, on November 1st of this year they inputted a 10% price increase basically across the board to offset their rising costs.
If you look at the stock price, you might be freaking out a little bit, don't worry, the stock price actually is down substantially because they did a four-for-one stock split. In terms of capital return, the board gave the company the green light to buy back $1 billion worth of it's stock.
Now for the fourth-quarter, the upcoming quarter management is guiding for revenue growth of about 22%. Gross margin is expected to remain under pressure due to the supply chain challenges. However, if you look at the company's core business and the growth numbers they're putting up, it's very impressive that Arista is growing this fast, doing so profitably and management believes that there is meaningful room for growth ahead. If you're a bull on this business, you've got to be happy.
Brian Withers: Yeah Brian. Congrats to Arista Networks shareholders who've been patient and held on.
The stock has seemed to go sideways for a few years as the company was going through some slower growth. The stock has been a tremendous run this year, up around 70% year-to-date. Is it too late to get in on this company?
Brian Feroldi: Well like anything it's all about your time horizon. There is an earnings number here to look at. On a price to earnings ratio, this company is trading for about 36 times forward earnings.
Yes, given the stock price movement that you've seen today, that's higher than it was in the recent past but that's an indication that Wall Street believes that this company's growth rate is sustainable.
Importantly, the 20% growth plus if they're putting up, that's with the supply shortage and that doesn't include any of the price increases that they just pushed through. I don't think today's price is ridiculous.
It's definitely not as cheap as it has been in the past but if they can maintain 20% revenue growth while growing profits, I think if you buy today, you'll do just fine.
Brian Withers: Awesome. Thanks for that detailed and insightful update.
