JPM initiates ANET

at Neutral, +6% to their price target not that you should put any stock in that. Likes the firm, doesn’t like the valuation.



I concur that Arista seems to be a great, great firm.

This evening will be an excellent time to take a closer look at the valuation.…

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Well, the market took a closer look, and so far, not happy with re-iterating revenue for next Q and taking margins down.

Stock down $20 ah.

You get over a double-digit P/S ratio you gotta keep beating and raising not just above estimates but often over the whisper numbers also.

High margins breed more competition breed lower margins. Capitalism will be ever thus. There are very few FaceBooks in the world [and regulation are going to hurt their margins also].


High margins breed more competition breed lower margins.

There’s truth in that statement. But then it’s worth a pause to try and determine exactly how a significant competitor will emerge. Arista’s primary product is well protected intellectual property. They also have a well established market presence.

A disruptor has a high barrier to overcome. Even should one emerge, they will not take the market by storm, it will be in fits and starts nibbling at the edges. Cisco is still the dominant player in this market, but they are losing share. When Arista’s market share growth slows over a few quarters due to competitive forces there will be reason to exit. Other than that I see stock price volatility as noise. My impression of valuation concerns are largely short-sighted with an investment horizon of a quarter or so. At any given point in time over the last couple of years or more ANET has had an excessive evaluation. It has not yet been a good reason to avoid the stock.

But now, an analyst from JPM has identified the magic moment at which the evaluation will determine the future performance of Arista. Yeah, right. I’m not buying because I already have a 13.6% position (closer to 16.6% if you include 2020 leaps). I’m not selling either.


ANET down ~50pts since JPM’s report at Neutral, good call by that team.

Update from yesterday:

Price: $225.79
?Price Target: $255.00
Previous: $287.00

We are trimming estimates for Arista (ANET) following a closer look at data center capex trends for the top 4 US cloud service providers, which leads us to believe 2019 is likely to be a year of increasing consumption/utilization in conjunction with a slower pace of investments in data centers. While our long-term outlook for robust growth and secular tailwinds from growth in cloud capex remains unchanged, we believe there is greater cyclicality than expected by investors in 2019 within the longer-term secular trend, which could drive capex to decline -4% y/y in 2019, moderating the strong top-line growth demonstrated by Arista in the past. We maintain our Neutral rating with 13% upside to our $255 price target.

Cloud capex a secular tailwind for the industry and for Arista. Our long-term expectations for long-term growth in data center capex remains robust, led by the strong visibility into robust revenue growth for cloud companies, which in total are estimated to account for roughly three-quarters of total industry capex. We expect the secular tailwinds will drive Arista (most levered to data center capex and cloud customers in our coverage) to continue to deliver best-in-class top-line growth.

However, investment trends from top 4 US cloud service providers have greater cyclicality. A closer look at data center capex from top 4 cloud service providers shows that a period of strong investment is generally followed by period of increased consumption/utilization in conjunction with a slower pace of investments. Following a strong pace of increased investments in 2H17 and 1H18, we are expecting a sequential decline in 2H18 and a plateau in 1H19, before heading into another period of strong investments starting in 2H19.
Overall, we expect 2019 data center capex from the top 4 US cloud service customers to decline -4%, following successive years of strong growth.

Forecast softer top-line growth for Arista in 2019 and lower our December 2019 price target to $255. We now forecast top-line growth of +18% y/y for Arista relative to +22% y/y prior, marking a deceleration over the 29% growth forecasted for 2018E, led by a decline in capex from the large cloud customers in 2019. However, following a period of lower investment from cloud customers in 2019, we expect a reacceleration in growth in 2020 (+20% y/y). We are trimming our December 2019 price to $255 from $287 prior, led by lower estimates. Despite our lower than consensus growth expectation for 2019, we are maintaining our Neutral rating on ANET shares with 13% upside to our price target, following a -27% decline in the share price from the highs in late August."

Just an fyi.


Ironically enough, Gary Alexander, who often writes about companies being overvalued (which has looked/proven to be correct a lot more than usual this week), just put out this article about Arista being a rather good value. Near the end, he calculated a PEG of 0.55, which is a rather great number for that metric.

Arista Networks: In Deep Value Territory $ANET

Not just value territory, but deep value territory

Still long ANET, but less so than earlier in the year


At this point in time it should be glaringly obvious that “value” is something far different than just small eps and price to sales etc.

In the current sell off, it seems anecdotally, that the better “value” stocks got hurt worse than the “market darlings” or at least not any difference to write home about.

A stock gets cheap for a reason. I keep hearing about how Micron only has a 4 p/e. Well great. It is not likely, unless it gets rid of its fabs and becomes a software company that its P/e is going to change much soon.

Square never got cheap despite a 30% crash. To this day it is outrageously overvalued if you read the headlines on SA, or some analysts opinions (one now capitulating as had on hold since 2016 - which reflects WoW capitulation, that is often indicative of a interim top as such capitulation by rule of thumb analysts is usually getting the tail end of the WoW - the final 20%).

I will never again, ever, buy a “cheap” stock. If it is not considered overvalued I have no interest in it at all anymore.

That is not to say I am going to buy bubbles, or just buy at any old place, but will buy at relative valuation opportunities.

As relates to ANET, why is it becoming deep value? Not because the market has not been generally positive. No, because the market in its collective wisdom (and FUD and other events often toss the rationality of this out the window) has determined that ANET’s CAP or growth rate are declining. So great, its “on sale”. I will not touch it anymore.

But then again you can look at a Nvidia and both pronounce it overvalued and undervalued based upon your forward looking opinions. But ANET is now traditionally valued as it sheds its prior hyper growth skin and heads into markets now where it no longer is really the pioneer first mover as its competitors have learned, and it now sells into entrenched markets, unlike the nascent markets it once created. That is a real material difference. Look what happened with Juniper and Cisco and Network Appliance, as example. All great companies, but they devoured their markets to the point that the growth just left. Thus all have low multiples.

My opinion anyways on the topic. Id rather find the disruptive hypergrowth and not the more staid and once were…



Square never got cheap despite a 30% crash. To this day it is outrageously overvalued if you read the headlines on SA, or some analysts opinions (one now capitulating as had on hold since 2016 - which reflects WoW capitulation, that is often indicative of a interim top as such capitulation by rule of thumb analysts is usually getting the tail end of the WoW - the final 20%).

I would consider Square cheap but that is just how I look at it. Now ZS is expensive but did you see what happened to it in the latest blip. Hardly moved at all.


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… and that from a guy who was ‘all in’ ANET just earlier this year. Valuation and evaluations are changing drastically.
I don’t think Arista’s growth is at an end. Your cloud services have to run on top of the lower layers. There are and will be new technology generations and they are in a very good position to capitalize on them. They will continue to grow at a good clip.
When the market gets less interested in ANET, that’s when to buy it.