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Arista Networks- Waiting for the Other Shoe to Drop

By Rick Walter
02/14/20
4:00 PM

Cloud storage and solution companies are the next up and coming hot area for investment. Companies like Amazon and Microsoft are competing mightily for this business and winning. However, there are other smaller or mid-size players in the field that could also be huge winners in this growing, lucrative market.

I started following Arista Networks in the 3rd quarter of last year. Since that time the stock has fluctuated from a high of $249.49 on Sept 12, 2019, to a low of $185.30 on November 1, 2019. The stock since then has ground back up to the $240 range on February 12, 2020, only to fall back to the $218 price levels after earning announcements on February 13, 2020.

The numbers weren’t bad but they weren’t that good either. I listened in on the company’s webcast yesterday and I was not impressed with the presentation. The overall guidance for the upcoming first and second quarters for this year was very confusing. I couldn’t tell if the company was forecasting breakeven for the upcoming quarters, a slight loss, or a huge loss. Based on the previous 3rd quarter webcast last year, company officials reiterated that one of their major customers- (a cloud titan) who’s responsible for a good portion of their revenues, had not made a commitment or firm decision to continue to use their products and services going forward. Company officials said that they had to adjust to this uncertainty going forward. Fair enough.

However, in the fourth quarter, nothing was mentioned of this pending doom to the company’s revenue base and bottom-line. Instead, the company focused on collective doom stemming from the cloud industry itself. Huh! Analyst after analyst threw a multitude of questions that would or could shed light on the growth issues but were unable to pierce the cryptic responses from company officials.

This company initially fit our criteria for innovative product and services, consistent earnings per share growth and stable management with the ability to identify the risks in the markets and make prudent decisions to adjust to those risks. However, this company fails miserably in the management section. Just listen in on their earnings webcast and you will get an idea of what I am talking about. Is the stock a buy? We are uncertain, because no one could get a straight answer during the earnings call. Namely, “why is the company experiencing slower growth than most companies in one of the hottest growth markets today?”

We are holding off purchasing any more shares in this company until we can get better and clearer guidance. If management can’t give you a clear answer, then why should we or any other investor invest in the company?

We own shares of stock in Arista Networks.

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