Arista - Stability

Cross post from NPI with two additions in parentheses below:

Is there a case for stability in one’s portfolio?

Arista, I think, is a perfect example in my portfolio that represents the question.

We need to start with some sort of assumption. So, let’s say I believe growth will be 27% this year, 23% next year and 16% the following year. If you think those are totally unreasonable, feel free to ignore this or let us know why.

At those growth rates, Arista will be doing $3.9B in revenue ending 2021, 81% above today.
That isn’t Denny’s 10 year, 10 bagger, but it is a 7 bagger. Yet, I think the growth estimates are conservative and earnings will be even better. So there is upside there (if valued on earnings versus revenues).

Really, Arista has one competitor. Do we think that is going to stop in the next 5 years and some other entity will crop up taking significant market share? I don’t think that is very likely given the space. Do we really believe data is going to slow down significantly? I don’t think so.

The biggest concern is how big Microsoft was this year, but take a look at their cloud growth and that should answer the question. (Arista has already filled MSFT’s spend for the next quarter. Their cloud and the other big two are growing like crazy, plus we haven’t factored in new campus growth expected to happen in the 2nd half of the year).

Let me know what you all think.



In my portfolio structure there’s absolutely a place for stability. To be clear, I’m of an age with a portfolio size that leads me to lower risk. YMMV.

With my portfolio I’m looking for the magic ‘4%’ rule to provide cash flow to make work optional. That might be a bad rule, and I’m not looking to quit working yet even as I find options.

Example, I’ve held NFLX for a decade or more, since my last bad experience at Blockbuster. NFLX, a company dismissed in the discussions here. It’s too big, growing too slow. Yet up ~86% in the first half of last year. I got lucky with that as one of my five or six ‘stable’ companies. Of course if you own NFLX it’s not really luck, it’s belief in a world-beating business, regardless of size.

I’ve been in and out of ANET a couple times in the last year. Options included, I’m up ~2%. Not that much different from ANET overall (with the friction costs of options and my learning another OT thread).

I’ll pick my ‘ballast’ and stability somewhere else from ANET. Again, my choices are mine.

NFLX, a company dismissed in the discussions here. It’s too big, growing too slow. Yet up ~86% in the first half of last year. I got lucky with that as one of my five or six ‘stable’ companies.

I know you used quotes on stable, but when this board refers to NFLX as stable (up 70%, down 45%, back up 57%… all in last 12 months), I start to get a little worried.


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I think there is a very strong case to be made for stability. I assume you define stability as: low chance of debacle, very high chance of strong performance, lower chance of massive outperformance. Port made of all these likely to do amazingly well.

I agree the odds of another competitor stealing share seem incredibly small. How could they jump ahead on development curve when ANET all-star team? And while doing that still get up sales/marketing in time to execute? Every year ANET getting better, smarter more data, iterating, improving, building relationships, etc.

If management and the tech are rock solid (which pretty much everyone agrees they are) odds of two things go up:

  1. invent new product or improve one so much it amps growth to get you Denny 10/10
  2. company gets bought for quick solid score

FWIW, I think I just talked myself back into joining you.


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Arista (I think) is an excellent company, very smart management, very clear product strategy, one big incumbent (more or less). And consequently the market expects pretty good things from them.

eg: DCF (all normal DCF caveats apply - these numbers are pretty much made up!!! Rev growth across top, start to converge to risk-free-rate at year 5, opMargin on left)

|       |   12.1% |   18.5% |   24.9% |   31.3% |   37.7% |
| 0.0%  |   -9.76 |  -30.99 |  -60.69 | -101.54 | -156.94 |
| 18.5% |   92.30 |  115.84 |  147.65 |  190.21 |  246.63 |
| 37.0% |  194.36 |  262.67 |  355.98 |  481.97 |  650.19 |
| 55.5% |  296.42 |  409.50 |  564.32 |  773.72 | 1053.76 |
| 74.0% |  398.48 |  556.34 |  772.66 | 1065.47 | 1457.32 |
Last price: 274.97

suggests the market is expecting… around a 20% revenue growth at ~35% margin (Aristas stated target). Thats pretty good.

If they perform ‘pretty good’ (as the market expects), then theoretically you will get no stock appreciation. If they perform ‘ok’ (not bad, but not pretty good), then the stock will drop etc.

I look for some catalyst for outperformance (warning: I’m a bit of a n00b). For Arista, the big catalyst I think is what will happen in the campus market, which we’ll start to hear in 2nd half of this year. If they can get traction in that market, which is basically just repackaging their current offerings for a new market… that would be awesome.

So thats my belief in the Arista future which I think the market is under-appreciating, or more likely, waiting to see.

Theres also the 400G space, which is a 2020 market for them, and I guess we would expect them to perform in the 400G market as they have in the 100G market.

So a couple of potential catalysts and an excellent company = reason to hold for me.


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Someone pointed out above that NFLX should not be considered a “stable” stock.

I’ll add that ANET also should not be considered a stable stock.

I own a lot of shares in ANET, started buying early November last year and continued to buy all the way into January. At one point I was down about 22% at the lows, but now I’m actually in the green by about 15%.

I bought in as a core position in my portfolio, but the price swings have been anything but stable.

At this point I’d be extremely happy with a double over the next 5 years. Even that might be asking quite a lot.


I hold ANET. Management is top notch. They are #1 in 100 gig market share. This year they think 100 gig should still help them grow. They talked about several wins in campus, did’nt give metrics. I can see 25% growth this year and with 400 gig starting next year they could maintain that pace for 3-5 years. So, not as fast as some of the SAAS stocks that we see here plus has the issues with hw. But I agree for the next few years I don’t see a slowdown in data switch market. Slower growth but its valuation is a lot lower (P/S of 9.5 vs 20+) and it has great net margins and cash flow.

Good point and I should make a distinction between the actual business and the stock price.
ANET has been a big winner for me buying around $60 and several times above that (well above).
No doubt the stock price has been volatile especially since growth moderated from the 40s/50s to the high 20s.

The stability with ANET is primarily based on earnings and significant cash generation with high, stable operating margins. In comparison, we still don’t know how many SaaS companies will fare as they begin to make money. Additionally, when companies do begin to make money, there is a chance valuations can be reset toward earnings creating price declines. Arista’s business is just much more mature at this point than many companies we follow and that would be the stability I’m referring to.

That maturity makes me feel a bit more comfortable about their competitive position. They’ve eaten Cisco’s lunch in 100G and will likely do so in 400G with campus as a near term catalyst for the business.

Don’t worry. I’m not selling all of my SaaS/software positions. I’m just making a case for a cash generating machine with outstanding management with few competitors. The high end of switching/routing seems to be a duopoly and Arista appears to have better products and a tight hold on Cloud Titans/other high end applications.


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When we started 2019 I felt that Arista had the most upside with the least downside risk of any tech stock in my portfolio.

Here is why:

My sense, after listening to lot’s of conference calls and last year’s investor day, is that it has one of the best management teams in Silicon Valley. I do not have the coding knowledge many on the board do, however, Arista’s design approach is much more elegant than Cisco’s resulting in easier operation for its customers. My guess is that this is due to the fact that Cisco acquired many many companies over the years which required a lot of spaghetti code to get everything to work together, where, on the other hand, Arista was founded with a simpler purpose and has had very few acquisitions to date. (This is just my simple way of thinking about it - based on a lot of listening and reading board posts of people who know a lot more about it than me.)

  1. Rock solid balance sheet - no long-term debt approximately $2 billion in cash, cash equivalents, or short-term investments.

  2. The company made two acquisitions last year and is entering the campus switching market. On a go forward basis all revenue and profit from the campus will be compared to zero from prior quarters - so this will be pure growth on a comparison basis.

  3. This year the company should earn between $9 and $10/share. Last year’s closing pricing of $210/share gave it a forward looking P/E of between 21 and 23.

  4. It should grow at about 25% in 2019.

  5. Next year we should see the roll out of 400G in production quantities - if the company can maintain the same type of market share it has at 100G it will continue to take share from competitors on an overall basis. My guess is that analysts will upgrade Arista in anticipation of Arista doing in 400G what it did in 100G sometime in the back half of 2019.

  6. This company should continue to ride the growth wave of cloud computing - so as it picks up market share in an environment that is growing and expands into the campus market it appears to me to have little downside risk and a lot of upside potential. (Remember the stock was at $210 entering the year.)

Frank - long ANET, see profile for all holdings


I can see Arista rev growth around 25% for the next 5y with 400 gig and success in Campus so basically the switch market. At that rate they will be $6b rev/y company. Beyond 5y how do you see Arista’s growth? To maintain 20%+ growth they would have to enter newer markets. Their main competitive advantage over incumbents like Cisco is their EOS. Can EOS help them enter markets beyond just switches?

It is very difficult if not impossible to see more than five years out for a technology driven company like Arista.

It is unknowable.

All one can do is trust that the management team in place today will be as smart or smarter over time and be able to continue to innovate in order to maintain a competitive advantage.

We can monitor performance by keeping up with company results, listening to the conference calls, and reading what folks have to say about the competitive landscape. Keep a watchful eye on the company’s culture and its attractiveness to prospective employees.

My bias is always to do nothing - so a “miss” in a quarter here or there - a short attack here or there - would not motivate me to change my position. I can withstand price volatility.

Competitive changes in the market, a new entrant into the market with a better mousetrap, that would make me reevaluate the investment.

Frank - long ANET, see profile for all holdings


Yes, I agree. What I was trying to say was the current competitive advantage is EOS but it seems that will help them only with the switch market. If they want to enter a new market they need a new competitive advantage other than EOS. Yes, with their all star cast they can do that.