Despite a daily gain of 3.14% and a 3-month gain of 29.02%, the question remains: Is Arista Networks Inc (ANET, Financial) stock fairly valued? With an Earnings Per Share (EPS) of 5.41, this article provides an in-depth analysis of the company's valuation. Read on to understand the intrinsic value of Arista Networks (ANET).
Company Introduction
Arista Networks is a prominent networking equipment provider, specializing in the sale of Ethernet switches and software to data centers. Its flagship product is the extensible operating system (EOS), which operates a single image across all its devices. Since its inception in 2004, the company has gradually gained market share, focusing on high-speed applications. Arista Networks counts Microsoft and Meta Platforms as its largest customers, generating approximately three-quarters of its sales from North America. As of August 21, 2023, Arista Networks has a market cap of $57.60 billion and sales of $5.30 billion.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides a visual representation of the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, the stock may be overvalued and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus' valuation method, Arista Networks (ANET, Financial) is believed to be fairly valued at its current price of $186.2 per share. Given that Arista Networks is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding whether to buy shares. Arista Networks has a cash-to-debt ratio of 72.36, which ranks better than 89.69% of 2356 companies in the Hardware industry. Based on this, GuruFocus ranks Arista Networks's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Arista Networks has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.30 billion and Earnings Per Share (EPS) of $5.41. Its operating margin is 36.12%, which ranks better than 98.76% of 2423 companies in the Hardware industry. Overall, the profitability of Arista Networks is ranked 10 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Arista Networks is 22.9%, which ranks better than 88.3% of 2324 companies in the Hardware industry. The 3-year average EBITDA growth is 24.7%, which ranks better than 71.73% of 1949 companies in the Hardware industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Arista Networks's return on invested capital is 52.3, and its cost of capital is 12.34.
Conclusion
In summary, the stock of Arista Networks (ANET, Financial) is believed to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 71.73% of 1949 companies in the Hardware industry. To learn more about Arista Networks stock, you can check out its 30-Year Financials here.
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