Arista Networks: Why Its Q2 Earnings Are Critical

Arista Networks’ (ANET) second-quarter earnings are expected on August 1. Analysts expect Arista Networks to post revenues of $606.86 million—a rise of 16.7% YoY (year-over-year). The adjusted EPS will likely be $2.2 or 14.0% higher YoY.

In the second quarter of 2018, Arista posted revenues of $519.85 million with an EPS of $1.93. So, how will the company perform in the second quarter? Will Arista Networks beat analysts’ estimates? Let’s see how the company performed in the last four quarters.

• The company beat analysts’ estimates of $2.07 by 11.6% in the first quarter.
• Arista Networks beat analysts’ estimates of $2.06 by 9.2% in the fourth quarter of 2018.
• Arista Networks beat analysts’ estimates of $1.84 by 14.7% in the third quarter of 2018.
• The company beat analysts’ estimates of $1.7 by 13.5% in the second quarter of 2018.

Arista Networks has a history of beating analysts’ estimates, which drove the company’s stock price higher. Arista Networks shares have returned 29.6% year-to-date, 282.0% in the last three years, and 318.0% in the last five years. However, the stock has been trading flat in the last 12 months.

In the second half of 2018, the tech sell-off and trade war concerns impacted Arista Networks shares. The stock fell from $305.0 in August 2018 to $187.08 in December 2018. The shares recovered in the first three months of 2019 and touched an all-time high of $331.27.

The trade war escalation and weak guidance announced during the first-quarter earnings call drove Arista Networks’ share price lower. In the first quarter, the company beat its revenue and earnings estimates. The company expected sales between $600 million and $610 million for the second quarter. Previously, analysts expected sales of $639 million in the second quarter.

Any deviance from the current estimates will cause the shares to trade significantly lower. The company’s revenue growth is already decelerating. Going forward, the earnings growth will also be lower compared to previous years.

The worldwide Ethernet switch market grew at a strong pace of 9.1% YoY in 2018 and 12.7% in the fourth quarter of 2018. Arista Network easily beat the market growth. The company’s Switch revenues rose 28.5% in 2018.

In the first quarter, the Switch market grew 7.8% YoY. Arista Networks’ sales grew 24.0% during this period. The company grew its Switching market share from 5.6% in 2017 to 6.5% in 2018 and 7.5% in the first quarter. Arista Network might gain from the US ban on Huawei. The US imposed the ban in May.

Huawei is one of the major players in networking. The company accounts for 8.9% of the total market.

We saw that the stock generated significant shareholder returns in the last five years. However, the stock has been trading flat since July 2018. The company’s revenue growth fell from 46.0% in 2017 to 31.0% in 2018. Analysts expect the revenues to rise 19.0% to $2.56 billion in 2019, 18.6% to $3.04 billion in 2020, and 17.5% to $3.56 billion in 2021.

The revenue growth is still solid. The company will have to improve its bottom line going forward. The company will have to focus on cost-saving efforts. The EPS will likely rise 16.7% annually over the next five years. The EPS is lower compared to the earnings growth of 50.0% in the last five years. In the second quarter, Arista Networks’ earnings growth of 14.0% is lower than its revenue growth of 16.7%, which indicates low operating leverage.

Arista Networks is trading at a forward PE ratio of 26.0x, which indicates that the stock is slightly overvalued. However, high growth companies usually trade at a premium valuation. The stock will likely move higher on an earnings beat after trading flat for almost a year.