Wall Street’s optimism about Arista Networks
Is Arista Networks stock overvalued?
Arista’s sales are expected to rise 23% in 2019, while its earnings are expected to rise at a lower rate of 16%. If we compare this expectation with Arista’s forward 2019 PE ratio of 39.6x, we might conclude that the stock is overvalued. The forward 2020 PE ratio for ANET is 33.4x. The company doesn’t pay a dividend and could remain overvalued even after falling 50% from its current level.
Ready to put your morning scrolling to use? Sign up for Bagels & Stox, our witty take on the top market and investment news straight to your inbox! Whether you’re a serious investor or just want to be informed, Bagels & Stox will be your favorite email.
Arista’s average PE ratio in the last five years has been 45.6x, while the company has managed to grow its earnings at a compound annual growth rate of 51% over the last five years. This performance has driven its stock price higher and created massive investor wealth.
The company’s sales growth is slowing. However, Arista has a robust portfolio of solutions that will help it outperform in terms of networking growth over the next few years. Arista needs to focus on improving its operating leverage and expanding its profit margins to support its high forward PE.
Increasing market share in switching
Arista Networks is one of the leading players in the hardware networking segment. Last year, the global Ethernet switch market grew at a robust pace of 9% to $28.1 billion. Arista outperformed the market’s growth, with its sales rising 28.5% in the year.
Arista increased its market share from 5.6% in 2017 to 6.5% in 2018. Cisco (CSCO) managed to grow its Ethernet sales by 5.2%, while sales for Huawei and Hewlett Packard Enterprise (HPE) rose 20.2% and 20%, respectively. Juniper’s (JNPR) switching sales fell 3% last year.