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Arista Networks, Inc. Posted By : admin
Posted On : Sunday, November 16, 2014
Company Name : Arista Networks, Inc. Investment Range : Long
Ticker : NYSE:ANET M.Cap.Range : Large-cap
Country : US Stock Price : 77.69
Description :        

Arista Networks, Inc. (ANET)

Line of Business

Arista Network derives revenue from sales of products and services. The Company generates revenue primarily from sales of switching products which incorporate the Company’s EOS software. The Company also generates services revenue from post contract support, or PCS, which end customers typically purchase in conjunction with the Company’s products.

Geographic Scope

• During the year ended December 31, 2013 and for the three months ended March 31, 2014, 83.8% and 83.0% of the Company’s revenue was generated from the Americas, substantially all from the United States, 10.8% and 9.9% from Europe, the Middle East and Africa and 5.4% and 7.1% from the Asia-Pacific region, respectively.

• During three and six months ended June 30, 2014, 74.8% and 78.1% of the Company’s revenue was generated from the Americas, substantially all from the United States, 15.0% and 12.7% from Europe, the Middle East and Africa and 10.2% and 9.2% from the Asia-Pacific region, respectively."

Quick Takeaway

• Overvalued: At this valuation company’s is not cheap. Company is trading at a PEG of more than 2 for the expected growth of around 39% in FY 2014 and 27% for the FY 2015. (Source: Zacks)

• Acquisition target: The Company’s seems to be a better acquisition target. The Company is in competition with networking major like CISCO, and the Company’s is improved offerings of  the competitors. Also the industry is undergoing lot of consolidation.

• Decline in growth: Expected growth of the Company will be subsidized to 30% levels. Since the existing customers have done their installations new customers growth determine the revenue growth of the Company."

Description of Business / Business Model

Arista Networks provides solution for large data center and high-performance computing environments. With more than two million cloud networking ports being deployed worldwide, Arista delivers a portfolio of 1/10/40 and 100GbE products that are used in network architectures, bring extensibility to networking, and dramatically change the price/performance of data center networks.

At the core of Arista's platform is the Extensible Operating System (EOS™), a network operating system with single-image consistency across hardware platforms, and modern core architecture enabling in-service upgrades and application extensibility."

Company Positives

• Strong management team: Experience management with huge interest in the Company.

• High R&D cost: Company spends heavily on the R&D expense. Almost 28% of FY 13 revenue was spent on R&D.

• Increasing customer base: Arista network is getting more traction because of migration to the cloud on the corporate, government, education and consumer levels. Cloud computing needs seamless instant integration of thousands of with high-speed switches with low power consumption and virtually no latency.

• Compatible platform OS: The Company has a software platform EOS (developed in Linux platform, a open source) which allows the monitoring, handling repair and patching of each switch individually if needed, which reduces latency and downtime in the case of failure. CISCO currently doesn’t have competence in this, which has given edge to the Company.

• Joint development of technology with the customers (VMware).

• Expansion of number of customers – Between December 31, 2010 and March 31, 2014, the Company’s cumulative end-customer base grew from approximately 570 to approximately 2,700."

Company Negatives

• Customer concentration: In FY 2013, Company’s revenue has been predominantly from single customer. Also company has mentioned that they have85% of sales from their existing customer. So the Company business model calls for continuous addition of new new customers to sustain the growth

• New to market: Arista's ability to scale its support programs to a global mainstream enterprise installed base is unproven.

• Litigation from its own founder: On April 4, 2014, Optumsoft filed a lawsuit against Arista Networks, Inc., in which it asserts ownership of certain components of our EOS network operating system pursuant to the terms of a 2004 agreement between the

• Third party merchants: Arista is reliant on merchant silicon vendors for its switch platforms, which could potentially limit the vendor's turnaround time for delivering products to customers."

Customers

• Between December 31, 2010 and March 31, 2014, the Company’s cumulative end-customer base grew from approximately 570 to approximately 2,500. As of June 2014, latest quarter number of customers has increased to 2,700.

• During the year ended December 31, 2013, approximately 85.2% of the revenue was received from our existing end customers."

Industry Overview

• Crehan Research, this market will grow from approximately $6 billion in 2013 to $12 billion in 2017, representing a 18.9% compound annual growth rate.

• Customers expenditure over Cloud –  Internet leaders like Amazon, eBay, Facebook, Google, Microsoft and Yahoo! pioneered the development of large-scale cloud data centers and these Companies have increased their capital spending from $8.9 billion in 2010 to $19.4 billion in 2013, representing a 29.6% compound annual growth rate."

Competitors

Company compete with large network equipment and system vendors, including Cisco Systems, Juniper Networks, Brocade Communications Systems, Hewlett-Packard and Dell. In the space of networking CISCO commands around 60% of market share.

Earnings Growth Driver

• Company’s growth is predominantly depended on the addition of new customers.

• Also the Company growth is driven by the promotion of sales to the existing customers. The Company has mentioned that almost 85% of revenue was from the existing customers."

M&A

NA

Comments on Financials

** The Company has reported just three years of financials, detailed research is not done and financials.

** The Company’s debt is not that significant and the Company has the history of free cash flow "

Valuations

Valuation of the Company compared to competitors are way too high. Also the Company went public in June 2014, hence there is less history of being in the market. On an expected growth rate of around 39.4% for the whole year 2014 PEG is around 2.1 and for the FY 2015, with a growth rate of 27.03% PEG is expected to be around 2.4. Considering this valuation the Company is trading at considerable premium factoring the future.

 
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