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Why Arista Networks Inc. Stock Popped Today

By Steve Symington - Feb 19, 2016 at 12:37PM

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The software-based cloud networking specialist ended 2015 on a high note. Here's what investors need to know.

What: Shares of Arista Networks (ANET 0.21%) were up 12% as of 11:00 a.m. EST Friday after the cloud networking solutions company reported strong fourth-quarter 2015 results.

So what: Quarterly revenue climbed 41.5% year over year to $245.4 million, well above the company's guidance provided last quarter for revenue between $238 million to $242 million. That translated to a 54.2% increase in adjusted net income to $57.5 million, and 50.9% growth in adjusted net income per diluted share to $0.80.

Analysts, on average, were anticipating adjusted net income of $0.61 per share, and revenue of $241.1 million.

Arista CEO Jayshree Ullal called his company's year "spectacular" before adding, "I have been pleased with the rapid acceptance by our customers of Arista's programmable cloud networking. The inevitable shift from legacy enterprises to cloud workloads has fueled Arista's strong performance of profitable revenue growth and increasing market share."

Now what: For the current quarter, Arista expects revenue between $232 million and $240 million, the midpoint of which represents 31.8% growth from the same year-ago period, and sits above Wall Street's consensus estimates for first-quarter 2016 revenue to grow 30.5% to $233.6 million. Meanwhile, Arista expects adjusted gross margin between 62% and 65% (compared to 63.6% in Q4, and 65.3% for all of 2015), and adjusted operating margin of 26% (compared to 29.1% in Q4, and 28.2% for all of 2015).

In the end, this is a fairly cut-and-dry case of Arista exceeding its own growth and profitability expectations, and those of Wall Street, then following up with strong guidance looking forward. Though shares of Arista Networks don't look exceedingly cheap at 44 times trailing 12-month earnings and 22.4 times this year's estimates, I still think that's a fair premium to pay given Arista's impressive top- and bottom-line growth.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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