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About Arista Networks
Some in my circles frequently discuss the importance of networking, however, I would argue that nobody knows just as much regarding the importance of networking as Arista Networks.
Headquartered in Santa Clara, California, Arista Networks is, well, a network company, and what that means for this firm in particular is that it is in the distinct business of developing and selling tailored hardware and software products for companies that need them the most; broad stroke technology companies.
Oh yeah, and at this point, I think every company or for-profit organization out there can be considered a technology company, but that’s just me.
Nevertheless, in adding a bit more necessary context, some of Arista’s largest enterprise clients are said to be Meta Platforms (formerly known as Facebook), Microsoft, Verizon, the Chicago Board Options Exchange (CBOE), Blue Cross Blue Shield, Cornell University, and plenty of others, all utilizing this company’s deep and wide networking products and boosting their own digital capabilities and overall backend system infrastructures in the process.
For instance, let’s take a company by the name of Microsoft.
The primary way in which Arista helps a client that just so happens to be one of the largest technology and cloud computing companies on the face of the earth is by, among other more supplemental and secondary functions, in most simple terms, being the backbone infrastructure through which data flows between a crazy amount of servers and computers (along with other devices), Arista’s main responsibility being transporting data from one digital space to another in a seamless and ultra-efficient fashion. Evidently, given just how exponentially important data and the preservation and overall flow thereof continues to become, I’d venture to say that a software company that is focused on networking such as this one has some long-term prevailing tailwinds in this regard.
Another example of an application of Arista’s platform(s) can be seen through the aforementioned CBOE, a widespread and tried-and-true trading environment that is responsible for consistently and incessantly processing and displaying prices of securities in a matter of milliseconds and what’s a company like this one without a company that can adequately handle all of the data, networks and switching involved like Arista?
In an increasingly data driven world, many large enterprises can rest easier at night knowing that a company such as Arista Networks is at the driver’s seat.
I will also briefly note that I’ve written somewhat recently on one of the company’s largest competitors, Cisco Systems.
While it is somewhat challenging to initially say whether or not this company is recession resistant, primarily due to the semi-cyclical nature of the software industry as a whole, I will say that the barriers to entry are fairly high in the networking business that Arista is engaged in as well as the fact that switching costs tend to be rather high in this environment, therefore, I don’t foresee this company losing a great deal of enterprise clients and other customers anytime soon given just how expensive it would be to switch over to one of Arista’s competitors, but also just how sticky and integrated this company’s services and software are once in a client’s system.
We’ve seen this with other software companies as well.
Oh yeah, and there is a lot this company can and likely has already done in terms of deploying and utilizing artificial intelligence.
At any rate, let’s dive deeper into this company from a more financially focused perspective in hopes of ultimately developing an opinion as to whether or not Arista’s stock (NYSE: ANET) is worth its weight in price.
Arista’s stock financials
With a current share price of $365.42 along with a market capitalization of a whopping $111.87 billion, no annually issued dividend offered to its shareholders at the moment and a price-to-earnings (P/E) ratio of 50.83, it can be initially found that Arista Networks is both a fairly valuable company, as it is somewhat rare that I find myself analyzing public companies that are worth north of $100 billion, along with it also being an expensively priced company, specifically in reference to its share price given its present price-to-earnings ratio being substantially higher than the commonly held, fair value benchmark of 20, where it is said that any security (fancy word for stock) that is trading above this threshold is said to be overvalued.
Now, being that this company is in the quickly growing enterprise software space, not to mention the general tailwinds stemming from AI (that are sadly probably already priced in, but who knows), I’d rather not make too many fast and loose assumptions as they relate to this company’s valuation, primarily in that if the company’s more recent annual revenue figures are climbing at a healthy rate, this could absolutely justify paying a bit of a premium for an ownership position in Arista.
Before checking in on the company’s revenues, however, let me briefly take a look at Arista Networks’ balance sheet.
Arista’s executive team is in charge of operating with and making the most of just about $9.9 billion in terms of total assets along with around $2.7 billion in terms of total liabilities, which is a very, very good overall balance sheet breakdown, if I do not say so myself, as Arista has plenty of coverage for its outstanding debts and other liabilities and also has the financial wherewithal to not only continue reinvesting in its own platforms, but I would argue more importantly focus on acquisitions, especially with the disruption to come in the networking nook of the technology sector and where it converges with artificial intelligence.
From the perspective of its balance sheet, Arista Networks is actually in a really great spot.
As it relates to the company’s income statement, Arista’s most recent annual revenue figures have also shown some promise, ranging between a relative low of $2.3 billion (2020) and a relative, most recently reported revenue figure which just so happened to also be a most recent high of nearly $5.9 billion, as displayed and reported in 2023, and I am frankly willing to offer this company a bit of grace being that 2020 was a challenging year for many companies, as even technology companies struggled as it relates to supply chain matters, among others.
This is some more than solid year-over-year (YOY) revenue growth, telling me that the ecosystem for Arista and its product and service offerings is widening and it is also becoming notably easier for this company to not only maintain but also attract new enterprise clients to its systems, which is surely a positive.
Moving onto the condition of the company’s cash flow statement, Arista Networks’ total cash from operations in recent years indicate that this company receives and invests more in some years than others, as the relevant range has been between $493 million (2022) and $2 billion, as reported in 2023, that is, also during and between the interval of 2019 and 2023. Given this range and the investing-heavy nature of the company’s platform and business model, I am not too put off by this range, as both of these figures are even still fairly sizable slices of the revenue pie, and combining that with the growth the company has been experiencing in terms of its total operating income (TOI), all the more reason for less concern.
Arista’s stock fundamentals
As it stands with the company’s net profit margin, according to the figures shown on Charles Schwab’s platform, Arista Networks’ is just music to my eyes.
While that is most certainly not how that saying goes, in the eyes of an objective, data-hungry investor such as myself, my heart is on the verge of leaping out of my chest, as the company’s net profit margin is pegged at a stunning 37.64%, and with respect to some of its largest and most capable competitors, including (but not limited to) the likes of Motorola and Cisco, with Arista, to put it most diplomatically, leaves them in the dust, as Motorola’s respective net profit margin is listed as 13.7% and Cisco’s displayed as being a more impressive but not quite good enough 21.88%.
I really haven’t had my socks blown off when it comes to a company’s net profit margin in a long time, but thankfully Arista Networks has fully bucked that trend and has given me something to look forward to and enjoy on this front, further alluding to the fact that it can continue generating a good deal of cash through its operations for the foreseeable future, and more than likely the long-term.
Should you buy Arista Networks stock?
Arista Networks’ shares (NYSE: ANET) are objectively overvalued in a pure price-to-earnings sense, however, when putting more of the pieces of the puzzle together and identifying this company’s phenomenal balance sheet, its most recently growing annual revenues (more than doubling between and during 2019 and 2023), its current and future potential integrations with artificial intelligence, its overall strong cash flows from its business operations and its incredible net profit margin, both on a sole, company-specific basis but also on the basis of comparison, I personally view Arista as having a longer runway ahead of itself over the next five or so years.
Therefore, I still consider this company’s stock a “buy.”
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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