Bear's take on Arista

Investment Analysis Clubs Saul’s Investing Discussions
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Cisco’s market cap is 10x because it is in a lot more markets than just DC switching.
If, and it is a huge IF, ANET can triple or quadruple their market share they would be at $6b/yr while Cisco is already at $6b/Q.

When NVIDIA hit the approx $6b/yr revenue mark, they were probably valued around $65b. Difference is they had 4 distinct markets, and not 1.

Last I will say about ANET, because I appreciate this board and have no desire to be a contrarian for contrarian’s sake. I have over a decade at one of the largest Channel VARs in the IT space. It is arguably the space I know the best, yet I wouldn’t invest in any of the top server, storage, or networking companies. Arista isn’t even on the radar, honestly. This tells me it really is a cloud giant play, and if you feel comfortable predicting how AWS, Azure, Google Cloud, and others will continue to build their infrastructure, then invest away. If you think those giants won’t develop their own competing switching gear, ask NVIDIA if any of those giants are making their own AI/DL chips. Just too much risk and uncertainty, long-term, for me. If you think the best products win in the IT space, look at Sun, or Hitachi, or Juniper, etc…

I wish all of you good luck, sincerely, and I do expect ANET will continue to grow in the short-term, it just doesn’t fit for a LTBH for me based on the industry it is in, the lack of diversity in markets (TAM), and the already large valuation and great run it has had the last couple of years.

-Dreamer

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22

Those speaking of the “lower forecast” for operating margin: what are you talking about?

Well, this is an easy one!

They just printed 36.1% OM, and they forecast 32% OM for next quarter.

Normal investors call that a ‘lower forecast.’

Which was also lower than the Street’s 33% forecast for next Q, if that means anything.

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23

<<<They just printed 36.1% OM, and they forecast 32% OM for next quarter.>>>

Najdor,

That statement in isolation makes sense (except for 32% margins! Come one1) management has been quite strident in trying to put into reality that the last Q was exceptional and they did not expect operating margins to be that high in the future.

However, analysts, who once modeled operating margins in the high 20s, have now stated they think 30-32% operating margins long-term looks realistic.

So the drop in operating margin forecast is consistent and not a downward surprise at all.

The gross margin drop is utterly minor.

The only thing that caused the shares to fall 19% is not the forecast for next quarter, that includes 40%+ revenue growth, but that mid-20s growth is forecast for the remainder of the year for each quarter.

I cannot say I blame the market for this. Although it is quite clear management has very little vision into growth more than a quarter or two out. They therefore guided to what they think will be their long-term and usual growth rate to expect. If something good happens it will be faster, if something bad happens it will be slower.

Uncertainty, and materially slowing growth, not fun stuff when you hold the stock.

there was no evidence that Arista’s CAP has been impacted. If that happened, with the above, it would be time to consider getting out. Watching margins is a proxy that CAP may be declining. But nothing in the margin projections indicate that.

Cisco is on a PR campaign as to how “resurgent” they are and they will be tackling Arista w 400 gb roll out, that is still a year away. But as things stand now Arista has 25% of the 100 gb market (market leader - from analyst question at earnings conference, whereas I read figures that Arista has 505 of the 100 gb market, but I will go with the analyst who should know his business), and therefore, why is Cisco focusing on taking down Arista on 400 gb when the market leader has less than 50% share?

Tinker

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Well, this is an easy one!

They just printed 36.1% OM, and they forecast 32% OM for next quarter.

Normal investors call that a ‘lower forecast.’

What they achieve is always higher than what they predict. It makes no sense to compare these two numbers. You’re comparing apples to eggplants.

Bear

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Fooldom is filled with stories of people who wrote covered calls on stocks they wished they still owned today.

Oh, I’m sure, without a doubt. But I think you may also find just as many that entered a “hot” stock near the peak and wished they had got out sooner, before the bottom fell out. Here are a few that might ring a bell; SSYS, DDD, XONE, OII, BKE, SSW, SWIR, PRAA, or more recently SVXY. Take a peek at the book “What Works on Wall Street”, it has plenty of examples of high-flying darlings that crashed back to earth.

If you continually chase the hottest stocks, and don’t use some kind of risk management strategies you’re bound to take a major, if not fatal, hit at some point. It doesn’t have to be covered calls. In the example I gave covered calls were to offset the cost of long puts. But there are other options.

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Invest wisely my friends

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Avoiding selling out of one FB, or Netflix, or Amazon, etc will make up for not selling out of 10 other stocks at their peak and watching them all go to zero (assuming the same amount invested in each).

And it would take a pretty bad run for ten of your stocks to go to zero vs one really big winner. And some of those stocks listed above aren’t even doing terribly despite being down from their peaks, not going to zero anytime soon.

Unless you’re near retirement age, Losing a life changing stock on the way up is a much bigger risk than losing some of your gains, especially when the company is still growing rapidly, in an expanding industry and you trust management.

-mekong

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For example, sell to open the June $300 call and buy to open the $220 put, which actually pays a credit of about $0.05. That gives you a safety net at $220 in case it keeps falling, and puts a cap on upside of > $50 from current position. You get 4 months of protection and it doesn’t even cost you anything.

Phil,

The problem with your suggestion is that included the bolded text, which demonstrably 100% wrong. If I were being dramatic I might say that this protection in fact costs you EVERYTHING: It costs you your upside.

If you had sold a call on Arista in October because you thought it was a “hot” stock near its peak (it was up almost 100% in just 10 months, from $100 to $190) it would have cost you. Arista is up about $60 a share as of today – that’s even after Friday’s collapse! That’s right, 30%+ in just 4 months.

I can put a finer point on it. Your suggestion now is to sell a $300 call – that’s 20% above the current price. If you’d done that when Arista was at $190, 20% would have meant the call strike was $228. So for every call you sold, you would have lost $2,200.

That is a cost.

Bear

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Paul,

The problem with your suggestion is that included the bolded text, which demonstrably 100% wrong. If I were being dramatic I might say that this protection in fact costs you EVERYTHING: It costs you your upside.

Yes, of course, with the benefit of hindsight we can cherry pick a price and date to make any kind of point. Looking at just the last trading day ANET dropped from a high of $311 to $249, over 19%, so an equally opportune time to sell a covered call would have been last Thursday.

A covered call doesn’t have to take you out of your position unless you want it to, you can always roll up/out, or buy it back, or instead of buying the shares outright you can always buy a call instead - which has a limited downside, but no cap on upside. I’ve actually used long calls, and credit spreads, with very good results and very limited risk.

Nonetheless, I get that it may not for everyone, but I think some people, maybe more than a few, might just be willing to leave a little profit on the table at times to avoid a big drawdown.

-----
Invest wisely my friends
CMFSoloFool - Ticker Guide / Share Holder
Profile and holdings: https://goo.gl/TYTU4S

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Last I will say about ANET, because I appreciate this board and have no desire to be a contrarian for contrarian’s sake.

Hey Dreamer, even though I disagree with you, I still hope you continue to post your analysis and thoughts on ANET, and other stocks, here on this board.

To continue, I would argue that Arista isn’t a limited one-market company. While they have hit a sweet spot with the cloud titans today, they have made it clear (slide 12 in https://www.slideshare.net/aristanetworks2017/2017-highlight… ) that their intent is to move down into what they call “Cloud Class Verticals” and even “Cloud Converged Enterprise.” Arista’s “Leaf and Spine” architecture can scale both up and down, since the economic ROI is so compelling and ease of setup and use is high.

I have over a decade at one of the largest Channel VARs in the IT space… Arista isn’t even on the radar, honestly. … If you think the best products win in the IT space, look at Sun, or Hitachi, or Juniper, etc…

I’m probably drinking the Kool-Aid about now, but your list of ‘winner’ companies has me licking my chops. As I said earlier, Juniper is just a faster Cisco in a world that’s moving away from that shared hardware-centric, multi-layered networking model. Hitachi Data Systems is undergoing its own transformation, laying off some employees last year as it tries to reinvent itself as an “IoT, Cloud, and Services” oriented company, now called Hitachi Vantara. And Sun Microsystems doesn’t even exist anymore, having been bought out by Oracle years ago.

In my view, those companies all represent yesterday’s world. Perhaps your company should check out Arista’s VAR partner program: https://www.arista.com/en/partner . ;^)

BTW, I spent years at a large storage company and saw how upcoming disruptive technology started wreaking havoc internally. When I found a new position at a company in another industry, a Senior VP tried to talk me out of leaving. Turns out he had read Christensen, but still he couldn’t answer me how the company would be more like Nikon and less like Kodak.

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What i meant was that juniper sun and hitachi were all, at times in the past, considered the best products. I am not saying to look at them now. The point was that having the best product doesnt guarantee stock market success let alone market share success.

DellEMC, HPE, VMware, Cisco, Lenovo/IBM, NetApp…they all tout a roadmap of “next gen” and all tout their solutions as better than competitors. Some clients buy based on familiarity…buying what they know will work will keep them employed. Most buy based on price…because most enterprise-class products are decent and comparable and the business gains are neglible from one brand or the other.

Arista has been selling dc switches in hpe converged systems like the c700 since 2015. It may have been better in east/west traffic but i doubt it beat out very many flexpods or vblocks. Selling against ciaco is extremely difficult, and most of the time the reason isnt product-based.

-Dreamer

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https://www.networkcomputing.com/data-centers/ethernet-switc…

I admit it, I solve mysteries. It is one of the things I do professionally.

Here is a mystery, what is Cisco doing suing and making their named arch enemy Arista when Arista is th #4 switch vendor in the world? That is what this June 2017 marketshare finding shows.

Perhaps it is because in 100gb, that is expected to be larger than 10gb, and last longer, and then 400 and 800 go, that may be larger still, At least in 100 gb, ARista is the market leader with marketshare 4 to 5x what it has in the rest of the Ethernet switching market that just started rolling out last year (which would be one reason it is not on the radar, as Arista’s marketshare is quite small otherwise). Somehow though Cisco knew they had to sue and try to destroy Arista. The #4 switch vendor.

SDN is the disruptive force in the network. It dramatically reduces costs and complexity while decreasing latency.

Could it be that Arista’s strength is not a better faster router (as in fact, Arista onl spends 10% of its R&D on hardware, and 90% on software) but because it can do with software what Cisco cannot because doing so for Cisco would kill Cisco’s margins and put half the sales personnel on layoffs? Ie, innovator’s dilemma. How can Cisco continue its monopoly over the data center while still selling a hardware centric product, where each piece of hardware works only with another piece of Cisco hardware, connected by their proprietary software.

Could that be why Cisco has gone through the trouble of suing Arista, who at the time was even less than the #4 switch vendor, and specifically pointing out that Arista is their arch nemises?

I do sometimes read too much into things.

Tinker

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Could it be that Arista’s strength is not a better faster router (as in fact, Arista onl spends 10% of its R&D on hardware, and 90% on software) but because it can do with software what Cisco cannot because doing so for Cisco would kill Cisco’s margins and put half the sales personnel on layoffs?

Cisco made a grave error when the Randal Stevenson said he was moving AT&T to SDN. They did not get on board. Arista did.

Stevenson is NOT a super awesome guy, he is the head of a belmoth that has year over year negative top line growth in spite of buying companies left and right. He IS a man flying a broken plane with one engine out and another sputtering. I will give him credit, he never gives up.

I just completed an introductory VMware course and am taking SIP (Session Initiation Protocol) This is amazing stuff. I have been hearing about SIP for a few years now, it shows up in the network overviews when we are learning LTE (Long Term Evolution) and 5G.

Between virtualization, SIP, fiber to the house, and 5G, the network is going to be so flexable that it will reconfigure itself milli second by millisecond. The time it take a compentant Cisco network engineer to log in and run a script to bring up a virtual lan will be the equivalent of a few generations and the network will have evolved into something new by the time he got done.

Additionally, we are very thin on hands on labor. My territory spans three regen sites and a point of presence. This is about 100 miles north to south. I believe that in 7 years it will span over 200 miles, or the network will be shared, and a single technician will work for multiple companies. This will be required as the brains will probably be a rotation of engineers around the world and there simply will not be enough work for an entire technician in a thousand sqaure miles.

Is this bad for Arista! No! Even if Elon Musk’s pie in the sky internet fails, the cost to communicate will have fallen well below the cost of clean drinking water. In that case every place can have communications. Not just the developed countries.

Cheers
Qazulight

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"SDN is the disruptive force in the network. It dramatically reduces costs and complexity while decreasing latency.

Could it be that Arista’s strength is not a better faster router (as in fact, Arista onl spends 10% of its R&D on hardware, and 90% on software) but because it can do with software what Cisco cannot because doing so for Cisco would kill Cisco’s margins and put half the sales personnel on layoffs? Ie, innovator’s dilemma. How can Cisco continue its monopoly over the data center while still selling a hardware centric product, where each piece of hardware works only with another piece of Cisco hardware, connected by their proprietary software. "

SDN is not new…been getting trainings on it since at least 2013/2014. HPE does it, and has for years. VMware does it, and has for years. Look up “openflow” on wikipedia for a short summary:

**The Open Networking Foundation (ONF), a user-led organization dedicated to promotion and adoption of software-defined networking (SDN),[4] manages the OpenFlow standard.[5] ONF defines OpenFlow as the first standard communications interface defined between the control and forwarding layers of an SDN architecture. OpenFlow allows direct access to and manipulation of the forwarding plane of network devices such as switches and routers, both physical and virtual (hypervisor-based). It is the absence of an open interface to the forwarding plane that has led to the characterization of today’s networking devices as monolithic, closed, and mainframe-like. A protocol like OpenFlow is needed to move network control out of proprietary network switches and into control software that’s open source and locally managed.[6]

A number of network switch and router vendors have announced intent to support or are shipping supported switches for OpenFlow, including Alcatel-Lucent,[7] Big Switch Networks,[8] Brocade Communications,[9] Radisys,[10] Arista Networks, Pica8, NoviFlow, Huawei, Cisco, Dell EMC, Extreme Networks, IBM, Juniper Networks, Digisol, Larch Networks, Hewlett-Packard, NEC, and MikroTik.[11] Some network control plane implementations use the protocol to manage the network forwarding elements.[12] OpenFlow is mainly used between the switch and controller on a secure channel. A fairly comprehensive list of OpenFlow-related products may be found on the ONF website and the SDNCentral website.***

Cisco won’t be firing half their salesforce for anything Arista does, as Cisco is in more than just that market. Wireless, Security, Datacenter (compute via UCS), hyper-converged with Hyperflex. Cisco has also been trending towards a software vs hardware mentality for a few years now.

Being in the SDN space or leveraging software is not anything specific or exclusive to Arista. I say all this and I wouldn’t invest in Cisco stock, or HPE stock, etc…

-Dreamer

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What i meant was that juniper sun and hitachi were all, at times in the past, considered the best products. I am not saying to look at them now.

Please accept my apologies for not reading as carefully as I should have.

The point was that having the best product doesnt guarantee stock market success let alone market share success.

I agree 100%, but it’s sure not the sign of a market failure, either.

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