Forget Cisco. Arista Networks Is a Better Data Center Stock
Though 2018 is in the books as a down year for Arista Networks (NYSE: ANET), investing in the company is still one of the best ways to profit on the internet and its growing importance in everyday life. The cloud network and data center service and port provider is still a fast-growing endeavor, but it nevertheless got caught in the recent tech stock sell-off; shares ended down 11% for 2018.
Meanwhile, internet and cloud computing juggernaut Cisco (NASDAQ: CSCO) rose 13% in 2018 as slow and steady won the race during a volatile stretch for the stock market. Even so, for investors wanting to cash in on the rising importance of the cloud and data centers, Arista Networks is the better buy.
The internet goes to the cloud
The "cloud" has been growing by leaps and bounds the last few years. Companies are migrating their operations to a hosted data center or to their own on-campus facility to manage data and technology systems. Cisco is the longtime market leader selling proprietary hardware and software that enables the transfer of information over networks.
Much smaller upstart Arista thinks it has an advantage, however, as its hardware is cheaper, its software is native to cloud-based ecosystems, and it is open-source. While it's still the underdog, the numbers indicate Arista is on to something. According to tech researcher IDC, Arista's global market share of data center ethernet switches increased to 6.6% in the third quarter of 2018 compared with just 5.6% a year ago. Cisco's market share fell to 54.4% from 56.7% a year ago.
Nevertheless, there could be plenty more business to go around. According to Cisco's Visual Networking Index, global internet traffic is expected to triple by 2022 from 2017. That's a 26% compounded annual growth rate, which means lots of new potential sales to go around. However, it's Arista that's making the most of the movement.
The upstart has momentum
Through the third quarter of 2018, Arista's revenue was up 30% over the same period in 2017 -- including a 42% increase in service revenue as the company grows its data center management business alongside its hardware sales segment. Adjusted for one-time items, earnings were up 47%.
To finish out 2018, management thinks revenue will increase at least 24% year over year. Cisco has been no slouch either, putting up 8% sales growth during its last quarter and 5% over the trailing-12-month stretch. However, it's clear that it's Arista with the momentum right now. Investors have to pay a premium for those better results -- Arista's one-year forward price-to-earnings ratio is 23.7 compared with 13.1 for Cisco.
However, that's a reasonable premium to pay for a company outpacing its biggest competitor so handily. With internet traffic and data centers set to continue expanding, buying stock in Arista Networks looks like one of the best ways to take advantage of the movement.
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Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.