EUR 850.00 For Business Accounts Only

Morningstar | Another Record Quarter Pushes Arista Past $2 Billion for the Year; Raising FVE to $280. See Updated Analyst Note from 15 Feb 2019

Narrow-moat Arista Networks' 27% year-over-year growth matched our expectations as revenue grew to $596 million for the fourth quarter. Next quarter's guidance of 25% annual growth at the midpoint exceeded our outlook, and we now expect stronger services sales. We think Arista can sustain a longer period of strong growth as it diversifies its product portfolio toward the enterprise and campus spaces. Also, we believe that Arista is well positioned for the next wave of Ethernet speed, with adoption expected to start in the second half of 2019. A more positive outlook for Arista's potential in markets outside of cloud titans, increased sales and marketing presence, and our expectation for a longer period of growth cause us to increase our fair value estimate to $280 per share from $261. Shares jumped to around $260 after hours, and we advise investors to hold on to this security.

Arista's gross margins of 62.9% for the quarter were affected by an increased level of cloud titan spending. For the year, Microsoft represented 27% of Arista's total sales. While this high concentration gives us pause, we believe the company will develop a more diversified customer base as it continues to grow outside of its cloud vertical base. For the year, non-GAAP operating margin increased to 36.3% from 35.6%, which we find commendable, given Microsoft's pricing power.

For 2019, we believe Arista will strengthen sales and marketing efforts to assist in expanding its customer list and geographical footprint. We model revenue to outpace expenditures, which will create slight operating margin growth in 2019. Longer term, we expect Arista to continue its double-digit growth throughout 2022 as it expands into new customer verticals and remains the innovator for cloud titans. We believe Arista's movement into higher-margin segments with controlled expenditures will push operating margin into the mid-30s long term.

The cloud titans, comprising five large cloud service providers, represented the largest revenue source for the quarter and 2018. Arista's second-largest and fastest-growing segment for the year and quarter was the enterprise space. Management stated a new record for multi-million-dollar customer accounts, which we attribute to the enterprise space. For the year, Tier 2 specialized cloud customers were the third-largest segment, with financials and service providers tied for last. As we've seen across the networking equipment landscape, Arista also felt a headwind from the service provider space. In total, we believe Arista's innovation with the demanding cloud titans will continue to help its segue into a wider customer base as firms move toward more software-based networking management.