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Arista Networks Inc Valuation – April 2019 #ANET

Company Profile (excerpt from Reuters): Arista Networks, Inc., incorporated on December 2, 2011, is a supplier of cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. The Company develops, markets and sells cloud networking solutions, which consist of its Gigabit Ethernet switches and related software. The Company’s cloud networking solutions consist of its Extensible Operating System (EOS), a set of network applications and its Ethernet switching and routing platforms. The programmability of EOS has allowed the Company to create a set of software applications that address the requirements of cloud networking, including workflow automation, network visibility and analytics, and has also allowed it to integrate with a range of third-party applications for virtualization, management, automation, orchestration and network services. EOS supports cloud and virtualization solutions, including VMware NSX, Microsoft System Center, OpenStack and other cloud management frameworks.

Downloadable PDF version of this valuation:

ModernGraham Valuation of ANET – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,736,366,775 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 4.48 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 2711.11% Pass
6. Moderate PEmg Ratio PEmg < 20 58.38 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 11.81 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 4.48 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $5.36
MG Growth Estimate 15.00%
MG Value $206.51
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $77.78
MG Value based on 0% Growth $45.59
Market Implied Growth Rate 24.94%
Current Price $313.17
% of Intrinsic Value 151.65%

Arista Networks Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.09 in 2015 to an estimated $5.36 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 24.94% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Arista Networks Inc revealed the company was trading above its Graham Number of $72.85. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 58.38, which was above the industry average of 35.4. Finally, the company was trading above its Net Current Asset Value (NCAV) of $21.97.

Arista Networks Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $21.97
Graham Number $72.85
PEmg 58.38
Current Ratio 4.48
PB Ratio 11.81
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $2,714,802,000
Total Current Liabilities $606,504,000
Long-Term Debt $0
Total Assets $3,081,983,000
Intangible Assets $112,294,000
Total Liabilities $938,594,000
Shares Outstanding (Diluted Average) 80,844,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $8.30
Dec2018 $4.06
Dec2017 $5.35
Dec2016 $2.50
Dec2015 $1.67
Dec2014 $1.29
Dec2013 $0.73
Dec2012 $0.00
Dec2011 $0.63

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.36
Dec2018 $3.59
Dec2017 $3.00
Dec2016 $1.63
Dec2015 $1.09
Dec2014 $0.71
Dec2013 $0.37
Dec2012 $0.17
Dec2011 $0.21

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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