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Arista Networks Stock Has Fallen Over 14% This Month

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Arista stock returns

Arista Networks (ANET) stock has generated multifold returns to investors over the years. The stock has risen at a compound annual growth rate (or CAGR) of 59% in the last three years and 39% in the last five years. The hardware networking stock has fallen 14.4% so far this month. In April, we had identified Arista Networks as an overvalued stock, and the stock has since dropped 18.6%. The stock is currently trading 43% above its 52-week low of $187.08 and 19% below its 52-week high of $331.27. So what went wrong with Arista?

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Revenue and earnings growth

Arista stock gained an impressive 51% in the first three months of 2019. For the stock to move higher and support its lofty valuation, it had to beat Wall Street estimates and provide robust guidance.

Arista announced its first-quarter earnings results on May 2 and reported sales of $595.4 million, a rise of 26% YoY. Its adjusted EPS rose 29% to $2.31 in the first quarter.

Analysts expected the company to post revenue of $594.87 million with EPS of $2.07. While Arista marginally beat analysts’ revenue estimate, it beat their earnings estimate by 11.6% in the first quarter. However, ANET estimated sales between $600 million and $610 million in the second quarter, which was below Wall Street estimates of $639 million.

This guidance drove the stock lower. Arista sales have risen from $584 million in 2014 to $2.15 billion in 2018, which indicates a growth rate of 39% annually. Sales are expected to rise by a CAGR (compound annual growth rate) of 19% in the next three years.

ANET’s earnings per share have risen 50% annually in the last five years and are expected to grow at an annual rate of 17% in the next five years. The stock is trading at a forward PE multiple of 17.5x in 2019, and its earnings are expected to grow by 17.5% this year.

Is the stock overvalued?

Arista stock looks overvalued despite losing 14% this month, considering the PE multiple. ANET’s revenue growth is expected to decline by at least 50% in the next few years. EPS growth, though robust, is also declining.

Further, there is uncertainty regarding Trump’s tariff announcement, and the trade wars could continue in 2019 and beyond, dragging the market lower. ANET stock had a stellar run in 2019 and gained 27% this year despite the recent pullback. There is more scope for Arista’s stock to decline in the short term.

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