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Earnings Season Top Performer a Must-Own Cloud Solutions Stocks
Arista Networks reported earnings on Monday, October 30, and blew out earnings expectations, sending the stock to new all-time highs.
Arista Networks is a leading American technology company specializing in the development and manufacturing of high-performance networking solutions for data centers and cloud computing environments.
ANET stock has been one of the better performing stocks this year, rallying 80% by September. However, along with the broader market, had begun to experience some aggressive selling over the last month as tensions abroad mounted and interest rates made 17-year highs.
But a banner quarter put an end to the selling as investors realized what they were giving up. Now they are back in the market and have rushed in to buy back shares, sending the stock 25% higher over the last three days.
What is Drawing Back Investors?
Arista Networks Q3 sales of $1.51 billion beat analysts' estimates by 2% and showed a 28.3% YoY increase, while earnings of $1.83 per share topped estimates by 16.1%.
The upside surprise in profits was driven by an expansion in gross margins from 60.6% in Q2 to 62.4% in the current quarter and management raised Q4 sales guidance to $1.5 - $1.55 billion, which was above expectations.
ANET enjoys a Zacks Rank #1 (Strong Buy) rating, reflecting upward trending earnings revisions, and increasing the odds of a further rally in the near-term.
Big Tech Customers
Arista Networks' two biggest customers are Microsoft and Meta Platforms, and this quarter announced a new deal with Oracle who will add as much as 5% to total sales. Some analysts also expect ANET to win additional contracts from tech giant Alphabet in the near future, nicely rounding out its list of clients.
Thanks to the continued explosion in Cloud Computing, especially the segment used in Artificial Intelligence development Arista Networks is likely to experience growth tailwinds in the foreseeable future.
Although Alphabet sold off hard following its earnings report last week, it noted that its cloud computing segment had grown sales 22% YoY. It should be noted that Alphabet posted an earnings beat, but sold off nonetheless.
Microsoft also beat estimates when it reported earnings last week, and as the number two cloud computing platform in the market, showed strong growth. Cloud sales at Microsoft were up 19% YoY to $24.2 billion.
As the largest investor in the ChatGPT parent company OpenAI, Microsoft is leading the industry in AI enabled software.
Valuation
Today, Arista Networks is trading at a one year forward earnings multiple of 36.5x, which is above the industry average and above its five-year median of 33x.
And while that is a premium valuation, it should be noted that EPS are forecast to grow by an average 19% annually over the next 3-5 years, explaining why investors may be willing to pay up.
Bottom Line
Arista Networks is sitting at the intersection of the market's leading industries, with cloud computing and data centers on one side and Artificial Intelligence on the other. Because of these secular tailwinds ANET is likely to be a long-term winner and may be hard to ever scoop up at a significant discount.
Why Haven't You Looked at Zacks' Top Stocks?
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: Arista Networks, Microsoft, Meta Platforms, Oracle and Alphabet
For Immediate Release
Chicago, IL – November 2, 2023 – Today, Zacks Investment Ideas feature highlights Arista Networks (ANET - Free Report) , Microsoft (MSFT - Free Report) , Meta Platforms (META - Free Report) , Oracle (ORCL - Free Report) and Alphabet (GOOGL - Free Report) .
Earnings Season Top Performer a Must-Own Cloud Solutions Stocks
Arista Networks reported earnings on Monday, October 30, and blew out earnings expectations, sending the stock to new all-time highs.
Arista Networks is a leading American technology company specializing in the development and manufacturing of high-performance networking solutions for data centers and cloud computing environments.
ANET stock has been one of the better performing stocks this year, rallying 80% by September. However, along with the broader market, had begun to experience some aggressive selling over the last month as tensions abroad mounted and interest rates made 17-year highs.
But a banner quarter put an end to the selling as investors realized what they were giving up. Now they are back in the market and have rushed in to buy back shares, sending the stock 25% higher over the last three days.
What is Drawing Back Investors?
Arista Networks Q3 sales of $1.51 billion beat analysts' estimates by 2% and showed a 28.3% YoY increase, while earnings of $1.83 per share topped estimates by 16.1%.
The upside surprise in profits was driven by an expansion in gross margins from 60.6% in Q2 to 62.4% in the current quarter and management raised Q4 sales guidance to $1.5 - $1.55 billion, which was above expectations.
ANET enjoys a Zacks Rank #1 (Strong Buy) rating, reflecting upward trending earnings revisions, and increasing the odds of a further rally in the near-term.
Big Tech Customers
Arista Networks' two biggest customers are Microsoft and Meta Platforms, and this quarter announced a new deal with Oracle who will add as much as 5% to total sales. Some analysts also expect ANET to win additional contracts from tech giant Alphabet in the near future, nicely rounding out its list of clients.
Thanks to the continued explosion in Cloud Computing, especially the segment used in Artificial Intelligence development Arista Networks is likely to experience growth tailwinds in the foreseeable future.
Although Alphabet sold off hard following its earnings report last week, it noted that its cloud computing segment had grown sales 22% YoY. It should be noted that Alphabet posted an earnings beat, but sold off nonetheless.
Microsoft also beat estimates when it reported earnings last week, and as the number two cloud computing platform in the market, showed strong growth. Cloud sales at Microsoft were up 19% YoY to $24.2 billion.
As the largest investor in the ChatGPT parent company OpenAI, Microsoft is leading the industry in AI enabled software.
Valuation
Today, Arista Networks is trading at a one year forward earnings multiple of 36.5x, which is above the industry average and above its five-year median of 33x.
And while that is a premium valuation, it should be noted that EPS are forecast to grow by an average 19% annually over the next 3-5 years, explaining why investors may be willing to pay up.
Bottom Line
Arista Networks is sitting at the intersection of the market's leading industries, with cloud computing and data centers on one side and Artificial Intelligence on the other. Because of these secular tailwinds ANET is likely to be a long-term winner and may be hard to ever scoop up at a significant discount.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.