Smorg and Dave (FrickNFool),
Some things that give me conviction are:
- Recurring, subscription-based revenue
- The amount of time I’ve followed the stock
- Consistent, high rate of revenue growth – possibly even accelerating
- High gross margin
- Demonstrated ability to rein in spending
- Understanding why its customers love the company
For Arista, here’s my checklist:
- miss – mostly not recurring
- hit – I’ve followed for a couple years
- miss – revenue growth rate is high, but not consistent and certainly not accelerating
- half point – gross margin is solid but not spectacular (in the 60’s)
- hit – excellent leverage is one of my favorite things about ANET
- miss – I’m not a techie. I don’t really understand the product line that well.
So call that 2.5 out of 6. As you can see, no, my conviction really isn’t very high with ANET. I’d say the lumpy revenue growth and large amounts of product-based revenue are the biggest impediments to my conviction. I think Arista will keep coming out with awesome products and growing, but I have very little idea if that means increasing revenue 20% each year, or 10%, or 30%, or what. With SaaS companies, especially those growing at 40%+, it’s very likely that they continue growing at 30%+ or more. I can’t say that for Arista.
However, with a PE of roughly 35, I’m willing to stick around a couple quarters and see if revenue keeps growing at more like 30%. I even increased my position a few days ago when shares dipped under $220. I don’t think it deserves a PE of 50+ anymore, but the profits are still growing nicely so I think maybe the cigar has a few more puffs in it.
Bear