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Increased CapEx by the Cloud Titans in 2021 Will Benefit Arista Networks

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Arista Networks, Inc. (ANET), an industry leader in large data center and campus networking solutions, is scheduled to announce Q4’20 and full year results after the market closes on February 18, 2021. Expectations are that the company will continue to build on the sequential improvements seen in the last two quarters after posting subpar results in Q1’20, affected by COVID-related supply chain issues and soft demand.

Despite the ongoing pandemic, Arista Networks’ financial performance improved as the year progressed. However, revenue and EPS were still down after nine months, with year-over-year revenue dropping by 10.2%, from $1.86 billion in 2019 to $1.67 billion in 2020, and EPS dropping by 23%, from $7.39 to $5.68.

While management did not provide specific guidance for Q4’20 during the November earnings call, they did call for revenue growth of 13%-14% in 2021. This projection was based on an expected increase in CapEx spend by the ‘cloud titans’ and improved demand from large enterprises as the economy rebounds.

The cloud titans, including Microsoft (MSFT), Facebook (FB), and Amazon.com (AMZN) AWS, reduced their infrastructure spending in 2020, but that is expected to change in the coming year, and Arista Networks is positioned to be a prime beneficiary.

High Speed Data Center Switching Market

Arista Network’s main source of revenue comes from the high-speed data center ethernet switching and routing market. While trailing the industry leader Cisco (CSCO) in market share, Arista Networks has been making inroads for several years, with faster and more flexible technology. The company now has 16.3% market share versus Cisco’s 43.7%.

While the 100 Gbps ethernet switch is the current state-of-the-art technology, it will eventually be overtaken by the emerging 400 Gbps ethernet switching standard. Current projections suggest that 400 Gbps revenue will eclipse that of 100 Gbps by 2024. 

Even though Arista Networks is expected to maintain its industry leadership with the latest technology, there is concern that competitors, including less expensive unbranded routers called ‘white boxes’, may take market share away from Arista Networks. However, this is unlikely given that Arista Networks has been able to maintain its market share in the past, primarily due to its sophisticated operating software which provides customers with scalability and ease of use. 

Enterprise Networking and Security

In addition to high-speed data center ethernet switches, Arista Networks also provides hardware and software networking solutions for the enterprise market. The company offers subscription-based software applications for network management and cybersecurity, including Arista CloudVision and Arista Extensible Operating System (EOS).

Last year, Arista Networks entered the enterprise campus market, providing an additional source of revenue by supplying Cognitive Campus Workspaces consisting of modular 100 Gbps network platforms and associated software. The enterprise campus product line generated $100 million of sales in the first year.

Wall Street’s Take

From Wall Street analysts, Arista Networks earns a Moderate Buy consensus rating, based on 9 Buys and 4 Holds. Additionally, the average analyst price target of $323.23 puts the upside potential at 5%. (See Arista Networks stock analysis on TipRanks)

Summary and Conclusions

Arista Networks is an industry leader in the competitive high-speed data center ethernet switching market with 16.3% market share, slowly taking market share away from Cisco, which controls 43.7% of the market. In addition to the data center switching market, Arista Networks also provides subscription-based network management software, network security, and enterprise campus products and services.

As a result of the pandemic, Arista Networks experienced lower revenue and profits during the first nine months of 2020 compared to 2019, primarily due to supply chain issues and reduced spending by enterprises and the cloud titans. However, the company’s financial performance has improved each quarter since the onset of the pandemic, and this trend is set to continue in Q4’20, assuming that renewed lockdowns this winter did not significantly impact results.

Management has guided for relatively strong financial performance in 2021, with revenue growth of 13%-14% based on an improving economy and increased CapEx spend by the cloud titans.

Q4’20 results are expected to be released after market close on Thursday February 18, 2021.

Disclosure: On the date of publication, Steve Auger did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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