Arista bearish article

Investment Analysis Clubs Saul’s Investing Discussions
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Arista: An Exceptional Company Priced For Highly Profitable Growth https://seekingalpha.com/article/4185218?source=ansh $ANET, $CSCO

"Arista, led by an exceptional management, has been strongly growing since 2010, gaining market share in the cloud data center environment, thanks to its software-based network solution.

However, competitors are catching up and the threat of white box solutions is real.

The market, pricing growth and high margins, does not offer any margin of safety; therefore I am not buying at this price."

As I just bought into arista, this actually scares me, what are your thoughts? Is this because of the low growth estimate for next quarter?

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Hello Marko -

Arista is a fine company. It has done very well. Many of us here bought ANET shares 2 - 3 years ago when they were priced between $50 - $80 dollars. The share price took off in 2017 and some (such as I) harvested profits and sold. I see ANET now as an overpriced company. I would only reinvest if the share price came down significantly.

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As I just bought into arista, this actually scares me, what are your thoughts?

Hi Marko,
The reasons I exited, as I remember, was that they kept predicting only 25% growth, and I started to think that maybe they had a better handle on it than I did, and that I should quit thinking that they are just sandbagging. Also because it seemed that they were having to enter a new field to continue to grow, the enterprise market, where Cisco is more firmly dug in, and has more pull, than in the cloud titan field where Arista currently is, as the cloud titans have more pull and don’t have to bend to Cisco’s will, so to speak. I’ve heard a bit about while boxes but don’t know anything about their competitive position. I know nothing about the competition besides Cisco. I suspect that Arista will continue to grow for some years, just considerably slower, and slower than many of our other stocks. Take into account that I am not a techie and I have to listen to people who know more about it than I do.
Saul

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Also because it seemed that they were having to enter a new field to continue to grow, the enterprise market, where Cisco is more firmly dug in, and has more pull, than in the cloud titan field where Arista currently is, as the cloud titans have more pull and don’t have to bend to Cisco’s will, so to speak.

What Saul says makes a lot of sense as always. However, when it comes to the competitive landscape, I tend to think like Smorg on this one: http://discussion.fool.com/does-anet-really-belong-in-the-doghou…

The market, pricing growth and high margins, does not offer any margin of safety; therefore I am not buying at this price.

Actually I think the article is dead wrong on this point. The margins are good, but I could see them getting even better. Arista grew revenue 41% last quarter. But EPS grew 78%! They are still improving in terms of operating leverage.

In the upcoming quarter, they’re forecasting $100m+ more revenue YoY. (For the quarter!) 35% goes to costs of goods sold, but of the other $65m or so, I bet they take 50m to the bottom line. Add to that any potential sandbagging they’re doing, and the upside potential seems a lot bigger than the downside.

Bear

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Happy 10+ year Foolversary Saul!

The Motley Fool truly struck gold when you decided to share your wisdom on the boards.

Thanks for all you do!

Brian

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Saul echos two of the main points in the article:

they kept predicting only 25% growth…I suspect that Arista will continue to grow for some years, just considerably slower, and slower than many of our other stocks.

While I know Saul and this board exclusive seek out the high fliers, and so can write “only 25% growth” with a straight face, for myself I can find room in my portfolio for consistently growing stocks with great management. And, as Saul points out, they’ve been conservative in their forward looking statements for a while now.

I’ve heard a bit about white boxes…

White box is hardware that is assembled from readily available components. For instance, gaming enthusiasts buying motherboards, CPUs, memory, drives, fans, etc. separately and then make a desktop computer out of them that performs better at a lower cost than name brands. Small companies may build white box hardware for sale to other companies at a lower cost than name brand hardware. Large companies may build white boxes for their own use.

The issue with white boxes for networking, of course, is what software you run on them. There are a few open source packages that can be pieced together, but for this to really work you’ve still got to write some of your own. So, if you’re using white boxes for networking you need to have the resources and expertise, and you have to be large enough to make this development and support effort worthwhile.

Arista provides another alternative: You can license their software to run on your own white box hardware. This is recurring revenue to Arista as long as the software is in use, but it’s a small part of their business today. I don’t know that it’s going to grow to be significant, but my feeling is that as Arista’s software gets more and more sophisticated (for instance, they use AI for predictive related performance enhancements), it’ll be harder to justify writing your own.

But, what really gets me about the SA article is that the author says over and over how smart Arista’s management is. I agree. But my thinking is that if he really thinks they’re smart, then why does he think they don’t understand the business threats and opportunities, and aren’t making the right moves?

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