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

By:
on Aug 11, 2021
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  • Arista's business has proven improvements throughout the second fiscal quarter
  • Arista trades at more than thirty times TTM EBITDA
  • The risk/reward ratio is not good for long-term investors

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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.

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

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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%.

“We reported strong year-over-year revenue growth of approximately 29% for the first half of 2021, reflecting healthy demand across all our market sectors combined with favorable comparisons from the first half of 2020,” said Ita Brennan, Chief Financial Officer of Arista Networks.

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

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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.

Data source: tradingview.com

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

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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.

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