Global businesses are moving their information technology workloads at a rapid pace to the cloud. The global cloud computing market is forecasted to grow from $445 billion in 2021 to a staggering $947 billion by 2026, a compound annual growth rate of a rapid 16.3% over the period.
This high growth in cloud adoption is driven by a variety of factors, including greater flexibility for companies, as they can take advantage of cost effective computing power on demand as required. In addition, trends such as hybrid work, artificial intelligence, internet of things and machine learning are only accelerating the adoption of cloud technology.
Arista Networks Inc. (ANET, Financial) is a leading supplier of data center networking equipment, so it is poised to ride this trend in increasing cloud adoption. According to the company's investor presentation, Cloud Intra-Datacenter Traffic on its servers is growing at an average rate of a meteoric 50% per year. Let’s dive into the company's business model and financials to determine if it offers good value potential currently.
Business model
Since 2004, Arista Networks has been at the cutting edge of providing data center networking equipment with a software layer. It went public in 2014 and today has over 7,000 customers globally. This includes various Fortune 500 companies such as the cloud titans, financial companies and specialty cloud service providers. Arista is a leader in high-performance computing, virtual machines and even high-frequency trading terminals for financial companies.
The company supplies a variety of high-performance network switches, which can be seamlessly monitored via its CloudVision software and enables the automation of tasks as well as gives flexibility for artificial intelligence and machine learning processes to be done on client data. Arista Networks also offers a “Cognitive” Wi-Fi solution, which allows a more scalable, robust and high-speed network to be created.
(Source: investor presentation)
Growing Financials
Arista’s revenue is growing fast. It generated $2.9 billion in fiscal 2021, which was up 26% from $2.3 billion in 2020. This is complemented by high software-like gross margins of 62% and $1.8 billion in gross profit. The company also achieved high net margins of 28.9%.
Arista is investing approximately $586 million per year in research and development, which is necessary to keep innovating in the technology industry.
In terms of the balance sheet, the company has just $620 million in cash and cash equivalents. Although liabilities look high at $1.7 billion, I believe most of this is deferred revenue and, therefore, not debt.
The valuation of Arista is looking fairly high currently. According to the GF Value line, which analyzes historic multiples, along with an adjustment factor for past performance and future earnings projections, the stock is significantly overvalued.
Gurus investing
Legendary Investor Paul Tudor Jones (Trades, Portfolio) bought shares in the fourth quarter of 2021 for an average price of $120 per share. The stock is now around $130 per share. However, it should be noted that value investor Joel Greenblatt (Trades, Portfolio) sold out of his position in the same quarter.
Insider selling
There has been a vast amount of insider selling recently as well, which has occurred from many board members such as the senior vice president and chief technology officer. This is a red flag in my eyes as it could be a signal they belive the stock may be priced too high. 
Final thoughts
Arista Networks is a true innovator in the data center equipment arena. The company has a top-level product, which is ideally suited for high-performance computing applications. It has seen strong revenue growth and has high margins to complement this. However, the company is richly priced right now. If we combine that with the insider selling, the stock is not appealing to me right now. For full disclosure, I did previously own the stock last year and it will continue to stay on my watch list.
