Can Arista's Earnings Make Its Stock Bounce Back in 2016?

Image: Arista Networks.

Few investors argue about the growth potential of the cloud-computing industry and its capacity to revolutionize the way that the business world handles in technology needs. Yet stocks of companies in the sector have suffered lately, and Arista Networks (ANET -0.80%) has been one of the victims of the recent downturn. Coming into Thursday's fourth-quarter financial report, Arista shareholders hope that the company can follow the lead of networking giant Cisco Systems (CSCO 0.67%), whose shares climbed after reporting solid results in a challenging macroeconomic environment. Let's look more closely at what's been happening with Arista Networks lately and what investors can expect in its quarterly report.

Stats on Arista Networks

Source: Yahoo! Finance.

Can Arista Networks give investors blowout earnings?
In recent months, investors have been mildly optimistic about the longer-term prospects for Arista earnings, boosting their full-year 2016 projections by about 1%. The stock has gone in the other direction, dropping 18% since early November.

Arista Networks' third-quarter results actually built up some enthusiasm going into the last part of 2015. Top-line growth came in at 40%, and Arista boosted its adjusted net income by more than half, topping estimates. The company reported progress in bringing integrated security services into its CloudVision product, and it also continued to work toward tying in its offerings into the popular HP OneView product. Various collaborations have helped Arista gain acceptance and compete effectively against its rivals.

By January, however, the stock had started to fall precipitously. Some fears stemmed from broader trends in the technology industry, responding to reports from other companies that enterprises were pulling back from spending on cloud-computing and other technology upgrades.

Of particular concern to Arista investors was the resolution of patent claims that Cisco Systems (CSCO 0.67%) had made against the company. Many analysts suggested before the decision that a Cisco win wouldn't necessarily crush Arista because of expected workarounds that would limit the potential disruption to its business going forward.

Indeed, when the decision came down in early February, the International Trade Commission found in favor of Cisco, finding that Arista had violated only some of the patents that Cisco had included in its lawsuit. To many people's surprise, Arista stock jumped after the decision, in part because the patents at issue were largely related to software issues and therefore could be remedied more easily than if Cisco had won on all of its infringement allegations.

Cisco Systems' fiscal second-quarter results announced last week also helped push Arista Networks shares higher. Cisco said that it expected its revenue to rise during the current quarter, defying calls among most investors for a slight decline in sales. Some of Cisco's gains came from a huge $15 billion stock buyback and a dividend increase, but the confidence that those moves from Cisco show that the company has high hopes for the industry's prospects going forward.

In Arista Networks' quarterly report, investors should focus their attention on the company's efforts to continue releasing important new products. For instance, the ongoing Arista Extensible Operating System project could help define the company's cloud-computing efforts in 2016 and beyond, and investors need to know how well the project is going and what they can expect in the near-term from its efforts. Overall, if Arista Networks can demonstrate that it is still on track with all of its most important initiatives and that it can stay ahead of rivals like Cisco, then 2016 could be a good year for the stock to bounce back.