Best Ideas 2020: Arista Networks [ANET]

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My name is Hendi Susanto and I’m a portfolio manager and technology analyst with Gabelli Funds.


Arista Networks is our best idea for 2020 in the technology space.
The company is market leader in software-driven, cognitive cloud networking solutions for large-scale data centers, cloud service providers and enterprise campus environments.

The company has 76 million shares outstanding, trading at $225 dollars, for an equity market cap of $17.7 billion dollars.

Shares of Arista Networks recently took a hit after management shared a drastically weaker outlook for the fourth quarter 2019 and full year 2020.

The loss was driven by a major cloud customer who significantly reduced its forecast for the fourth quarter of 2019 and the entire year of 2020. Consequently, overall sales in its cloud titan vertical is expected to be flat to negative in 2020.

The company also said the overall market opportunity in new emerging 400-gigabyte is delayed.

We continue to have a favorable long-term view on Arista Networks and believe it can return to demonstrating strong top line growth again. We like its:

• competitive strengths
• multiple avenues of growth and
• sustainable high operating profitability.

Arista’s impressive compound annual growth rate of 39% for four years ending in 2018 is a testament to its compelling product portfolio, which includes:

• First and foremost, a strong core switches business with advantages over Cisco, a major competitor
• Second, market expansion opportunities in routing, enterprise, international and service provider markets
• Third, multiple new areas including Cognitive Campus network infrastructure, representing $3 to 4 billion total addressable market; Mojo Networks Cognitive Wi-Fi Edge, and the upcoming multiyear 400 gigabit deployment by cloud titans.


We believe that Arista Networks valuation is attractive.
The shares are currently trading at $225, a 14.5x Enterprise Value to EBITDA based on our 2021 projection.

Underscoring our positive outlook on the company, we estimate a Private Market Value of $317 per share in 2021.
Category
Routers and Switches
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