This may be the cause for the "tepid"

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This is what the CEO told Barron’s.

“Arista shares fell 16% as it failed to impress with its financial forecast for the first time since going public in 2014. CEO Jayshree Ullal tells Barron’s the issues that hampered its cloud computing networking sales, which involved customers having to test a change in its technology made as a result of its ongoing legal battle with Cisco, should abate over the course of this year, while most analysts said the company’s long term growth rate is not threatened. The bears do, however, point to a lofty valuation as the reason for the sell-off.”

I don’t have the subscription, but here is the link,

https://www.barrons.com/articles/arista-ceo-ullal-you-cant-m……

Zangwei

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From the Barron’s article:

Raymond James’s Simon Leopold writes that the buy-side was probably looking for about $470 to $475 million in revenue last quarter, versus the $468 million reported.

Paul Silverstein with Cowen & Co., who has an Outperform rating on the stock, writes that the outlook “marks the first time that we can recall ANET’s having only guided for in-line revenue growth."

"ANET has beat-and-raised v. Street consensus by over 3 – 4% every single quarter since going public in June 2014,” he observes.

Chief executive Jayshree Ullal*“The biggest thing for investors to realize is that Arista has been a consistent performer; we try to do the right thing, we’re not playing by the Street or offering a solution for the moment.”*

Ullal was enthusiastic about the company’s rising software component, and its success selling more gear to enterprise customers to manage their networks.

Calling the software turn “one of my favorite initiatives,” Ullal said software is "going to become a meaningful component” of the company’s business, “and one we look to break out as it becomes material.”

Among analyst notes to clients today, price targets are actually rising at some shops, and bulls all are advising staying the course, as they say.

Cowen’s Silverstein advises “don’t stop believing,” and urges investors to buy the drop, while adding the shares are “obviously not for the faint of heart.”

Even the bears are insisting Arista’s “story” remains intact.

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Thanks Zangwei and Kevin. I bought shares in after hours yesterday, and I’m planning on holding onto them.

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$8 a share in earning in 2018. Nothing magical about it. Even if Arista simply earns $1.71 a share for each of the first 3 quarters this year (unlikely as margins keep growing as does revenue), and then has 40% earnings growth in Q4, you still get $7.53 in earnings per share (unadjusted for stock dilution, which won’t be major). Getting to $8 a share is not a real high hurdle.

Street earning estimates have to go up as the high estimate was at $7.20 and a real outlier, and that was based on Q4 earnings being estimated at $1.42 per share, not $1.71 a share.

Based upon the Street estimate of $1.42 a share, using the same methodology as I used to derive $7.20 a share, you would only get $6.25 a share in earnings. A substantial difference.

As for the sell off, these two articles give more clarity in regard to the concerns:

https://www.investors.com/news/technology/how-cisco-legal-ba…

https://www.barrons.com/articles/arista-ceo-ullal-you-cant-m…

Primarily to do with the continuing workarounds on the patent front. This was suppose to be dealt with by the quarter, but will continue into next year. CEO says it will not affect the company the entire year, and that AI will drive demand for high speed equipment and software that Arista sells.

Uncertainty is the worst thing you can have in Wall Street. And yes, uncertainty we have as I cannot say what Arista will do. Is there a material secular slow down for Arista despite supposedly in the prime of their life with 100gb and 400 gb? If so, that is reason to sell. Take your profits and go.

If not, then it is reason to continue to hold or buy more.

The problem is we do not know which, and the above two articles is about the best that we have to figure it out. Which really is, is management just saying, “we are a normal company now, you cannot expect more from us and we feel good about it,” or are they just saying, “this too will pass, but we ethically cannot say more until w actually no more.”

Tinker

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Street earning estimates have to go up as the high estimate was at $7.20 and a real outlier, and that was based on Q4 earnings being estimated at $1.42 per share, not $1.71 a share.

Based upon the Street estimate of $1.42 a share, using the same methodology as I used to derive $7.20 a share, you would only get $6.25 a share in earnings. A substantial difference.

Assuming Arista has roughly the same operating margin of 36%, I took a stab at what earnings would be based on the following revenue growth rates for the next four quarters - 37% (mid-point of guidance) and 25% for the next three quarters. This should be fairly conservative other than assuming continued high margins though I don’t see a reason to assume otherwise. It does ignore SBC dilution which was a bit over 7% last year.

I come up with the following EPS figures:
1.67, 1.85, 1.99, 2.14
$7.65 is the total for a forward PE of about 33x.

A.J.

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To correct the language f my post you corrected I got $7.56, $7.20 is the current high street estimate prior to earnings.

So we are both, wing conservative, deriving similar numbers.

Even being conservative like this, w earnings growing faster than revenues, plus cash piling up, that means 2019 is likely to be in excess of $10 a share, assuming 40% eps growth on slower 25% revenue growth. More than $2
Billion in cash. Perhaps $3 billion.

‘Tis the reason I should not watch the market every day. But it is like not peeking at the model in bikini, you just can’t help yourself.

Tinker

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(unlikely as margins keep growing as does revenue

Arista just forecast lower margins. Why would you say differently?

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Arista just forecast lower margins. Why would you say differently?

You’re right, NajdorfSicilian. It did. The company also forecast lower op margins in Q3 for Q4 before beating their own guidance. And forecast lower op margins in Q2 for Q3 before beating their own guidance again. Seems they regularly forecast lower op margins before convincingly beating it.

I’m not saying the company will do it again, but if I were a betting man…

Matt
Long ANET

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<<<Arista just forecast lower margins. Why would you say differently?>>>

Arista just grew revenues at more than 40% and yet Marketing and Sales and Admin expenses went down or grew at much lower rate than growth. The company has normally had less than 10% of revenues as its marketing and sales spend. Remarkably low, particularly as to how well the product sells.

This means, as mentioned earlier by another poster, the product is selling itself, which create quite a bit of financial leverage as the greater volume that is sold the less cost per sale.

So yes, earnings growth is very likely to exceed revenue growth going forward unless Arista has to materially grow its sales and marketing or administrative expenses.

The decrease in gross margins was quite minor and it could be due to change in product mixture, increase in cost of DRAM, or a whole bunch of variable things.

Tinker

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when you ‘know’ more, it might be ‘too late’ and you could miss the opportunity that this uncertainty offer.
Certainly if you believe in its long term growth, you can forgo this shorter term opportunity and only ride the long term for more gains.
You can also think that Cisco is going to eventually dull Arista’s edge in which case you would consider getting out of the stock. I do not think that would be the way to go.

It is the big Cisco that is reacting. Arista is plowing ahead and it is maintaining the initiative here. It is definitely a drag to be tormented by the big kid on the block but my bet is for Arista to continue to shake it off and to emerge. Some secular growth will come from the need for 100G/400G. This is definitely the immediate green field to seize and that attracts attention from competitors (Cisco). Arista is very well positioned to capture it.

Ullal’s comment about the continued ‘move towards software’ is also interesting. There are things they could do in term of business model…or maybe I am imagining more things that what she might be saying.

tj

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The decrease in gross margins was quite minor and it could be due to change in product mixture

Yes, but they forecast a much bigger drop for the upcoming Q.

Of course, they may be low-balling but that’s a hard way to bet.

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Yes, but they forecast a much bigger drop for the upcoming Q.

Of course, they may be low-balling but that’s a hard way to bet.

It is tough to find potential big rewards that don’t have risks, of course.

https://www.treasury.gov/resource-center/data-chart-center/i…

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