ANET 2.0 - For Your Consideration

Investment Analysis Clubs Saul’s Investing Discussions
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Greetings Warriors!

Speaking of the ANET (uproar and everyone is, it seems :slight_smile: ) without arm twisting in either direction, I would like to point out some possibly helpful considerations for each of us.

• ANET did get ahead of itself. Shares tripled last year. Look at a chart and extend it out even 2 years at any angle you want. The line goes off the chart, literally and figuratively. Take the current income statement and run the numbers out any way you want, and see what the price needs to be to keep on soaring at its recent pace from 2016 to yesterday. Again, things quickly go off the charts.

• Fast growers always have periods of price retraction—always. Everyone wants it until too many are in the game. For proof, look at any present or former fast-grower. Amazon had major periods of price retraction, as did Netflix, as did Microsoft, as did SHOP, as did every single company that eventually succeeded big time. The believers stay in because they believe in the company’s future success while the fearful and traders sell out because they are fearful of getting less than 100% returns over the next few months. Who is right? Only time will tell. Question: Do you believe? There is no right answer—yet.

• No one seems to be able to put themselves in Jayshree’s shoes. You have a behemoth chasing you. They have major resources, enough to make your life even more miserable than a few lawsuits—and most would agree that “a few lawsuits” can be quite a time and resource-gobbling hinderance for any company. Should the CEO predict huge increases and predict the smashing of the behemoth and spitting in the face of her former employer-now-turned frenemy? Or should she play it cool and keep her head down and stay on track taking care of business? I vote … well, it doesn’t matter. What do you vote?

• Does anyone here not wish they had bought any of these companies early and held on for 10 or more years? Microsoft, Netflix, Amazon, Cisco … add your own names. We’re here for many different reasons. Me? I’m here to hunt down the next Amazon or Netflix. Opinions differ, thank goodness, or we wouldn’t have a buy-and-sell open market to invest in. Assuming each us wants the next Amazon or Netflix or (you name it) –which is not a forgone conclusion, but what could be better for an investor?—then we must choose which of the younger companies we believe will supplant the current companies on the Ultimate Winners List. Is ANET one of those? Personally I believe it will be on the wall plaque someday, but I could be wrong, in which case I’m still making excellent capital growth investing in ANET.

• I don’t care if you invest in ANET, sell out or keep holding if you are an owner. I have nothing to gain from it either way. I’m only interested in your opinions on the quality of the company, its management and its capital allocations. Are they good enough to weather this storm? We each have to decide for ourselves. The only thing I do recommend is to listen to, and read all you can and follow your gut instinct. Don’t rely on anyone else’s opinion. Consider it, yes. Follow it, no.

• If I’m wrong, what is the downside? Will I lose money? Probably not. Will I be exposed to considerable opportunity cost? Possible, maybe even probable.

• What if I’m right but choose to play it safe and bail out of ANET now? Will I lose money? No, I’m still well into the black with an enviable CAGR after this little squabble. Will I be exposed to considerable opportunity cost? Definitely, possibly a huge lost opportunity cost, although I will never hold a company to a point anywhere near where huge losses loom. Rule #1 is alive and well in my camp.

• Did ANET NEED to have a price-cutting event for the long-term health of its owners? I’ll leave the answer up to you, but please consider the question carefully. (not the answer, the question.) Regardless of your personal answer, if you can just see that the question is absolutely necessary, you get it. I like the way you think. :slight_smile:

• Buy, Add, Sell, Trim or Hold—What’s the best decision? I’m sorry, but my opinion is not what’s important here. What’s your opinion?

"You can’t make everyone happy all the time, all you can do, is do the right thing,”–Jayshree Ullal

Amen. If nothing else, please make a decision, whatever it is, with confidence. And other than for the learning opportunity, don’t look back. Make it without second-guessing your decision. I hope I helped someone decide, pro or con, and more importantly, to be satisfied with the decision. There is no hurry either. Study all you can until you are satisfied with your chosen reaction to yesterday’s news.

IF ANET_DECISION = “UNDECIDED”
. THEN PRINT “PLEASE SKIP NEXT PARAGRAPH.”
. GO TO END
ELSE
. PRINT NEXT_PARAGRAPH
. CONTINUE
ENDIF

'NEXT PARAGRAPH
Ok, you asked for it. For me, as you can probably tell, the answer is easy. IMO the 2017 outcome and 2018 outlook are almost ideal. The business plan is intact and we got the price break that was so necessary to the market. Everybody wins. But your mileage and opinion may vary and if it does, I say well done (but pardon me, I hope you’re wrong.) :slight_smile: Yesterday my position size was considerable. Next week, with any luck it will be substantial.

'END
Good investing all,

Dan

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In the end the value of a company is how much cash it can print adjusted for risk for its shareholders.

This past Q ANET produced $183.7 million in cash from operations. Unlike most companies, ANET has very little in terms of capital expenditures, thus it gets to keep most of this cash.

Year over Year ANET has improved its cash position by 79%, nearly by $700 million or $175 million per quarter.

Taking this quarters cash productio of $183.7 million, and dropping out $1.5 billion of cash in the bank, you get an enterprise value of around $16.7 billion. Annualized $183.7 million (and this may or may not be accurate, but it is not much more than total cash production over the last year, you get 183.7*4 =$734.8 million in new cash.

$16.7 billion / $734 million =22.5 x cash flow (and free cash flow is just a tiny bit less as Arista has very low capital expenses). The free cash flow is enhanced by the use of stock options, but I am not going to run all those details. That is what analysts are for.

Unless Arista is becoming a Brocade or an NTAP or a current Juniper, and is not dominating its field, is not continuing to grow, is not likely to have long term market beating growth, with such growth continuing to increase cash production, 22.7x!

On its face Arista looks pricey. People cite price to sale, or ttm P/E. But what people don’t look at is forward looking P/E or EV/E or the same with EV (enterprise value)/cash flow production.

With any market leading growth stock you never can judge it on trailing earnings. It is always valued for future earnings. 22x?

Is a “resurget” Cisco going to take out a material part of Arista’s business so any past or current cash flow is of no use in valuations going forward? Obviously I say no, but that is why we are here, tell me why I am right or wrong on this.

I always find enterprise value is the best valuation to go on, and in the end, the amount of cash the business can product superior to all other measures. ANET’s product has been so superior that it does very rare things in regard to leverages cash production.

Tinker

24 Likes
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Agreed very much, Tinker.

Enterprise Value is actually a relatively new-to-me metric over the last few months, but I have been thinking for the past week or two about it being so superior to market cap in trying to guess an appropriate valuatio . I had even been contemplating writing a long-ish post about that. I’ll save that for now, and only point out one high point that will be like some of John Madden’s football commentary (some will think, “but of course” and some will realize “yes, that is indeed the true essence of business ownership by stockholders, etc.”).

A big thing with EV being superior to market cap is the simple fact that debt-holders are higher in line than equity holders. If a company has preferred stock rather than only common stock, the preferred stockholders get paid before the common. The debt-holders have “first dibs” on the cash generated by the business. More debt-holders is more ownership dilution (just like SBC).

Hearing a week or so ago that Amazon had actually passed Apple in EV was a big factor in my realization and on-going thoughts…as has been reading some of Bert’s writeups and noting his frequent use of EV/sales ratios and then also doing my own analysis writeups last weekend of CELG, UBNT, IRBT, and SWIR (http://discussion.fool.com/bear-type-earningssaul-type-port-revi… ) after their respective earnings announcements.

Here’s a Seeking Alpha article about EV vs. market cap that might have beaten me to the punch with making a case for EV as a superior metric.
https://seekingalpha.com/article/4141672?source=ansh

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