Arista Networks: Buy This Stock on Negative Volatility
Date of report: January 18, 2018
Arista Networks is poised to benefit from the trend of strong spending on public cloud services and infrastructure, which is forecast by IDC to more than double from an estimated $128b in 2017 to $266b in 2021. Already this cloud networking solutions company has taken more than a 14% share in the high speed data networking market while its largest competitor Cisco Systems share in this market has declined to just over 50%, according to Crehan Research. In its own words, Arista Networks has been “…outperforming Cisco in “price, product, roadmap and vision.” Arista is demonstrating very strong fundamental momentum, with ROIC reaching its highest level in 11 quarters. Over the last several quarters financial results have consistently come ahead of expectations, which has been followed by guidance higher than consensus. Given the company’s normalized revenue growth assumptions of 20-30% and non-GAAP operating margins of 30-32%, the stock is very attractive on a relative basis. Our price target of $298 was recently increased from $264 to take into account a likely lower tax rate of 20% versus our previous assumption of 28%. With the stock currently priced at $265 and monthly volatility of close to 11%, we suggest long-term investors keeping ANET in mind for a down day, which in recent quarters has seemed to occur just prior to the release financial results or on patent litigation news.
Arista Networks is engaged in providing cloud networking solutions, which consist of its Extensible Operating System (EOS), a set of network applications and its Ethernet switching and routing platforms. The programmability of EOS enable the company to create a set of software applications that address the requirements of cloud networking, including workflow automation, network visibility and analytics, and enable the company to integrate with third-party applications for virtualization, management, automation, orchestration and network services. EOS supports cloud and virtualization solutions, including VMware NSX, Microsoft System Center, OpenStack and other cloud management frameworks.
J. Stephen Castellano founded Ascendere Associates LLC to provide innovative equity research and investment advisory services that blends fundamental and quantitative approaches.
In general, our approach is quite simple -- we believe that return on invested capital and long-term earnings growth are key to stock valuation. More specifically, we use powerful and unique financial models that combine publicly available data, consensus estimates and our own inputs to generate consistent and actionable stock recommendations.
Among the services that Ascendere provides are: 1) detailed custom equity research analysis; 2) valuation scenario analysis studies; 3) long/short model portfolio strategies; 4) long and short idea generation; 5) portfolio feedback; 6) detailed fundamental financial modeling services; and 7) additional analytical consulting services. Recent financial modeling consulting clients have included several notable startups as well as BCG Platinion, the risk management division of Boston Consulting Group.
Mr. Castellano has over 20 years of experience in equity research and related consulting work. At PaineWebber, Warburg Dillon Read and Credit Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at Babson College (2005) and a BA from Oberlin College (1993).
Mr. Castellano's career history is highlighted below:
- Ascendere Associates, LLC (2009-Present)
- Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)
- Pyramid Research, Contract Consultant, Telecom Services (2002-2003)
- Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)
- Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)
- PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)
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