Should I invest in Arista Networks after a strong Q2 performance?

Arista Networks, Inc. (NYSE: ANET) shares have advanced more than 25% since the beginning of 2021; the company reported better than expected second-quarter results last week and expects to see strong trends in the upcoming quarters.

Fundamental analysis: Arista's business has proven improvements throughout the second fiscal quarter

Arista Networks is an American computer networking company that designs and sells multilayer network switches to deliver software-defined networking (SDN) solutions for large datacenter, cloud computing, high-performance computing, and high-frequency trading environments.

Arista's business has proven improvements throughout the second fiscal quarter, and the company reported better than expected results last week. Total revenue has increased by 30.8% Y/Y to $707.3 million, while the second quarter non-GAAP EPS was $2.72 (beats by $0.17).

It is important to mention that a non-GAAP gross margin was 65.2% in the second fiscal quarter, compared to a non-GAAP gross margin of 64.7% in the first quarter of 2021 and 64.7% in the second quarter of 2020. Arista Networks updated financial guidance for the third quarter and expects total revenue to be in a range between $725 million - $745 billion, while the non-GAAP gross margin should be between 63% to $65%.

Arista Networks repurchased $763 million or 3.6 million shares under the authorization program ($1 billion worth of shares over three years); still, the company did not repurchase any shares during the second quarter of 2021.

Arista Networks is in a good position to grow its business, but with a $28.8 billion market capitalization, this stock does not represent an opportunity for long-term investors. Arista trades at more than thirty times TTM EBITDA, the book value per share is less than $50, and there are not enough drivers to justify the current stock price.

Technical analysis: $350 represents the current support level

Technically looking, Arista Networks shares could advance above the current price levels in August 2021, but the risk/reward ratio is not good for long-term investors.

If the price jumps above $400, the next target could be around $420, but if the price falls below the $350 support level, it would be a firm "sell" signal.

Summary

Arista Networks reported better than expected second-quarter results last week, its share price continues to trade near record highs, but the risk/reward ratio is not good for long-term investors. Arista trades at more than thirty times TTM EBITDA, and the fundamental background doesn't justify the current stock price.