Arista Networks (ANET) New America

Recent IBD New America article on Arista……

First few paragraphs are on the history of the lawsuit and how it has caused the stock price to bounce around.

Regardless of how the legal battle ultimately plays out, a growing number of analysts sound confident that Arista’s strong technology and customer relationships will ensure robust financial growth over the long-term.

“We’re convinced that, while Cisco will likely win in some of its patent claims, it will not disrupt Arista’s business,” Oppenheimer analyst Ittai Kidron noted in a Jan. 4 report upgrading the stock to outperform.

Guggenheim Securities analyst Ryan Hutchinson offers a similar view, saying that even if Arista is found to have infringed on certain patents, any short-term weakness in the company’s stock price would be “a buying opportunity” thanks to its core strengths.

“We believe that a full injunction against Arista’s products is unlikely,” Hutchinson noted in a report. “In the event of partial injunction, manufacturing and/or R&D workarounds would not be overly difficult. As such, we would focus less on the near-term twists in the legal saga than Arista’s strong momentum, share gains and successful expansion efforts.”

That expansion has helped Arista become a much bigger player in recent years. The company is expected to post more than $830 million in revenue for 2015, up from less than $200 million as recently as 2012.

“Arista continues to gain market share at the expense of large incumbents such as Cisco and Juniper Networks (JNPR),” said Mark Sue, analyst at RBC Capital Markets. “Its rate and breadth of new customer wins give us added confidence that the top-line growth rate may be sustainable beyond just the near term.”

ITC ruling was due last week but the snowzilla storm in DC closed offices so it is now scheduled for Feb 2.

More IBD…

The company has grown year-over-year revenue at least 40% in its first five full quarters since going public in June 2014. Earnings have risen at least 47% over the same time period.

Arista has a wide portfolio of products, ranging from extensible operating systems, network applications and Ethernet data switches to cloud networking gear that manages traffic between Internet users and the data centers of major clients like Facebook (FB), Yahoo (YHOO), eBay (EBAY) and Microsoft (MSFT). Arista also has partnerships with high-profile tech firms such as HP (HPQ) and EMC (EMC).

Its latest product update came on Jan. 19, when it announced the next phase of Arista EOS, a Linux-based network operating system that gives customers real-time migration from legacy enterprise silos to private, public and hybrid cloud networking. The new phase features NetDBTM, a network-wide state repository designed to increase network scalability and efficiency.

New product introductions provide one growth avenue for Arista. Another comes from expansion in international markets, which currently provide less than one-quarter of overall revenue.

“Arista is expanding its global footprint methodically,” Hutchinson said. “It currently has a presence in over 18 countries and continues to build out infrastructure and pipelines. We believe international expansion can help sustain solid top-line growth, while driving operating leverage.”

The company is due to report 2015 fourth-quarter results after the close on Feb. 18. Analysts expect earnings of 61 cents a share, up 15% from the prior year. Revenue is seen rising 38% to $240.3 million.

Analyst Hutchinson likes the long term prospects…

“We expect the company to beat expectations for the quarter and to guide in-line to slightly ahead of consensus,” Hutchinson noted.

He sees growth coming from a couple of areas. One involves switching equipment that makes use of Broadcom’s (BCOM) “Tomahawk” chip, which is designed for network switch speeds of 25 gigabits per second, or 25G.

In September, Arista joined Cisco and Dell as the latest major vendor to unveil data center switches that support 25G, 50G and 100 billions of bits per second (Gbps) Ethernet. In addition, Arista upgraded its operating system software to support the new switches.

Hutchinson expects customer interest in Tomahawk “to sustain cloud demand” through the first half of year.

Another opportunity is tied to Broadcom’s Jericho chipset, an area where Arista will target technologies such as edge routing. As the name suggests, edge routing occurs at the edge or boundary of a network and helps ensure connectivity of the network tp external networks, a wide area network or the Internet.

“We believe there are a handful of multiyear deployment opportunities worth well north of $100 million tied to the adoption of the Jericho chipset in (the second half of 2016) and into 2017,” Hutchinson said.

They say a ruling against them will provide a buying opportunity and they don’t expect a ruling to be fatal to the business.

Here are some IBD ratings.

Composite Rating …80 Neutral
EPS Rating …98 Pass
RS Rating …52 Fail
Group RS Rating …C Neutral
SMR Rating …A Pass
Acc/Dis Rating …D- Fail

EPS strong, but more technical ratings are weak due market sell off and individual stock problems due to lawsuit.

Baron’s article on rising spending from telco helping Arista…

Citigroup’s Stanley Kovler initiated coverage of the stock with a Buy rating, and a $75 price target, writing that it could be one of the beneficiaries of the “cloud migration.”

Arista is in fact one of four companies Kovler starts today, the other three being Infinera (INFN), Ciena (CIEN), and Brocade Communications (BRCD). He has a Buy on Infinera as well, and Neutral ratings on Ciena and Brocade. Arista, however, is the only one of the four whose shares are rising today.

The basic premise is that the shift to cloud computing is changing the buyer pool from the telecom operators to the “hyperscale” cloud operators such as

Spending by Amazon and Alphabet (GOOGL) and Apple (AAPL) and others should be more even this year after being lumpy in 2015, Kovler anticipates.

Arista, he writes, already has “good growth with Webscale customers who continue to add to their data center footprint and are transitioning from investing heavily in their server infrastructure to scale-out storage as data continues to grow.

And on the lawsuit…

Arista expects an initial determination on January 27, 2016. This trial referred to 6 patents in question being asserted by Cisco. Since the completion of the trial in September, one of the patents in that case was dropped, leaving five remaining patents at stake. After that time, the ITC Commission reviews that initial determination and issues a final determination on May 27, 2016, at which point any potential import ban becomes enforceable. The next step is for this case to go to the U.S. trade representative who makes a final decision on the case on July 27, 2016 to either enforce or veto any potential import ban imposed by the ITC.

And a quote indicating benefits for INFN too…

The growth in Cloud spending and the migration of demand from Telcos and enterprises to Webscale customers is creating winners and losers in the SMID Cap Comm Equipment space. We prefer companies heavily exposed to growing areas of IT spending shifting to the Cloud from Enterprise / Telco capex that isn’t keeping pace with growth of Web 2.0 spending such as Arista (Webscale switching / networking) and Infinera (Data Center Interconnect) vs. Brocade (SAN Storage) and Ciena (less exposure to DCI and more to Telco / Optical).
Arista is currently at prices near the $56 low of Feb 2015 and not far above the first week of trading in June 2014. But Twitter is below IPO price in case you think that might be a back stop.