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ANET Stock Slumps despite Earnings Beat

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Aug. 2 2019, Published 12:36 p.m. ET

Hardware networking company Arista Networks (ANET) saw its stock fall over 9.0% in early market trading today. Arista announced its second-quarter results on August 1 after the market closed. It reported revenue of $608.3 million, a rise of 17.0% YoY (year-over-year). ANET reported adjusted EPS of $2.44, a rise of 26.4% YoY.

In the second quarter of 2018, Arista Networks reported sales of $519.85 million and EPS of $1.93. Analysts expected ANET to post revenue of $606.86 million and EPS of $2.2 in the second quarter. ANET easily beat Wall Street’s revenue and earnings estimates, but its stock has fallen significantly. Why?

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Why did ANET shares fall today?

During ANET’s earnings call, CFO Ita Brennan said, “As expected we experienced some softness in demand from our cloud customers in the second quarter. While early indications are for improved demand from these customers in the September period, we believe that second-half growth in this business will remain somewhat muted as compared to prior years. We expect our enterprise and financial verticals to continue to perform well, offset by some declines in the service provider business.”

ANET has forecast sales of between $647 million and $657 million for the third quarter. In comparison, analysts expect it to see sales of $650.85 million in the third quarter, so it looks like ANET’s guidance is in line with Wall Street’s. The stock’s fall could simply be a case of profit-booking by investors.

The recent price decline provides an opportunity

ANET stock is now down almost 10.0% today. However, its growth story remains intact. Its sales are estimated to grow 18.9% in 2019 and 18.5% in 2020. Arista is trading at a forward PE multiple of 23.3x, which isn’t too high considering its five-year annual EPS growth estimate of 17.0%.

ANET stock has created massive wealth for investors. Despite recent volatility, shares have returned 17.5% year-to-date and 246.0% in the last three years. Analysts have a 12-month average target price of $303.67 for Arista, indicating an upside potential of 23.0% from its current price.

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