Arista Networks Inc (ANET, Financial) marked a daily gain of 2.43% and has seen a 3-month gain of 7.27%. The company's Earnings Per Share (EPS) stands at 5.41. The question we aim to answer is: Is Arista Networks fairly valued? In the following analysis, we will delve into the financial strength, profitability, growth, and intrinsic value of Arista Networks.
Company Overview
Arista Networks is a networking equipment provider, primarily selling Ethernet switches and software to data centers. Its flagship product is its extensible operating system (EOS), a single image running across all its devices. Founded in 2004, Arista Networks has steadily gained market share, focusing on high-speed applications. With Microsoft and Meta Platforms as its largest customers, Arista Networks derives roughly three-quarters of its sales from North America.
The company's current stock price stands at $191.64, with a market cap of $59.30 billion. Our analysis reveals that the stock's fair value, or GF Value, is $186.69, indicating that Arista Networks is fairly valued. The following sections will provide a deeper understanding of the company's value, combining financial assessment with crucial company details.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock, derived from our proprietary method. The GF Value Line on our summary page provides an overview of the fair value that the stock should be traded at. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Given the current price of $191.64 per share and the market cap of $59.30 billion, we believe that Arista Networks stock is fairly valued. As such, 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
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to research and review a company's financial strength before purchasing shares. Key indicators of financial strength include the company's cash-to-debt ratio and interest coverage. Arista Networks boasts a cash-to-debt ratio of 72.36, ranking better than 89.82% of 2358 companies in the Hardware industry. Overall, Arista Networks' financial strength is rated 8 out of 10, indicating robust financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low 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%, ranking better than 98.8% of 2426 companies in the Hardware industry. Overall, the profitability of Arista Networks is ranked 10 out of 10, indicating strong profitability.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Arista Networks is 22.9%, which ranks better than 88.25% of 2324 companies in the Hardware industry. The 3-year average EBITDA growth rate is 24.7%, ranking better than 71.58% of 1949 companies in the Hardware industry.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Arista Networks's return on invested capital is 52.3, and its cost of capital is 12.22.
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 robust. Its growth ranks better than 71.58% of 1949 companies in the Hardware industry. For a more detailed analysis of Arista Networks stock, you can check out its 30-Year Financials here.
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