Arista Aims to Keep Its Earnings Growth Strong

By Markets Fool.com


Image source: Arista Networks.

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Even fast-growing industries run into speedbumps, and that's something that investors in Arista Networks can understand quite well. Following a crushing blow to business analytics provider Tableau Software in February, the entire cloud-computing space suffered in sympathy, and Arista had to deal with the fallout in its stock price. Yet coming into its May 5 first-quarter financial report, Arista shareholders have largely regained their confidence about the cloud-networking company's prospects for future sales and earnings growth. Let's take an early look at what Arista Networks has seen lately and whether investors should be upbeat about its impending results.

Stats on Arista Networks

Expected EPS Growth

22%

Expected Revenue Growth

33%

Trailing Earnings Multiple

40

Expected 5-Year Annualized Growth Rate

22%

Data source: Yahoo! Finance.

What's ahead for Arista Networks earnings?
In recent months, investors have been a lot more optimistic about Arista Network earnings, increasing their views for the first quarter by a nickel per share to $0.61 and boosting their full-year 2016 and 2017 projections by roughly $0.15 to $0.20 per share. The stock has clawed back the ground it lost earlier in the quarter, rising more than 10% since late January.

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Arista Networks' fourth-quarter results set a positive tone to finish a strong 2015 for the cloud-networking specialist. Revenue jumped almost 42%, which was an even faster pace of growth than the company had managed earlier in the year. Adjusted earnings climbed by more than half, easily topping what investors had expected to see from Arista, and favorable guidance for the first quarter encouraged shareholders to believe that the company would be able to avoid the fate of Tableau Software and find businesses willing to invest in Arista's products.

Still, not everyone is convinced that Arista has put its troubles behind it permanently. In March, analysts at Jefferies issued a bearish note on the company, arguing that an initiative known as the Open Compute Project could pose a major threat to private cloud-networking solutions providers. The goal of the project, which includes major players in the social media and technology space, is to give content providers and other high-demand customers more options in building out IT infrastructures. Jefferies cut its price target on the stock by more than 20% to just over $40 per share, although the recent climb in the stock price shows that few investors are convinced by the analyst's logic right now.

If anything, that competitive threat should push Arista to work even harder. In late March, the company announced its 7500R series, a cloud networking platform that offers capacities of up to 115 terabits per second and more than 400 ports offering 100 gigabit-Ethernet density. As Arista Chief Development Officer Andreas Bechtolsheim put it, "The 7500R is the highest performance switching and routing platform that supports the full Internet routing table, enabling a Universal Spine in cloud-scale networks." As long as Arista's proprietary technology can stay ahead of any open-source projects aimed at offering alternatives to its products, the cloud-networking specialist should be able to retain business from high-end customers demanding the best available service.

Some also saw the 7500R as a jab at rival Cisco Systems , with which Arista has been waging legal battles and other competitive forays. For its part, Cisco's NCS 5500 router offers some of the same functionality that Arista built into its switch product, and Cisco bulls believe that it will take time for Arista to offer the same quality of router experience that Cisco does. Nevertheless, the moves show that Arista is willing to go head-to-head with much larger competitors, which will be necessary in the long run if the cloud-networking company wants to grow.

In Arista Networks' quarterly report, investors should watch out for any signs that the company's growth rate could start to deteriorate. Given its relatively high valuation, Arista stock needs for the company to stay on track. Any signs of slowing growth could put renewed pressure on share prices and signal that competitors' efforts to hold Arista down might be working.

The article Arista Aims to Keep Its Earnings Growth Strong originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool recommends Cisco Systems. 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.