Arista Networks Inc (ANET, Financial) experienced a daily loss of -2.6 %, but has shown a 3-month gain of 17.92 % and an Earnings Per Share (EPS) of 5.41. The question that arises is, is this stock fairly valued? In this analysis, we will delve into the valuation of Arista Networks, providing a detailed examination of its financial performance, growth prospects, and intrinsic worth. So, let's get started.
About Arista Networks
Arista Networks is a leading networking equipment provider, primarily selling Ethernet switches and software to data centers. The company's flagship product is its extensible operating system (EOS) that runs a single image across all of its devices. Since its inception in 2004, Arista Networks has consistently gained market share, focusing on high-speed applications. With Microsoft and Meta Platforms as its largest customers, the company generates roughly three quarters of its sales from North America.
At present, Arista Networks (ANET, Financial) trades at $191.36 per share, with a market cap of $59.20 billion. The company's GF Value, an estimation of the fair value, stands at $187.52, indicating that the stock is fairly valued.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
Arista Networks (ANET, Financial) appears to be fairly valued based on the GuruFocus Value calculation. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. As Arista Networks is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss, making it crucial to review a company's financial strength before deciding to buy shares. Arista Networks has a cash-to-debt ratio of 72.36, ranking better than 89.66% of 2350 companies in the Hardware industry. Based on this, GuruFocus ranks Arista Networks's financial strength as 8 out of 10, indicating a strong balance sheet.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. 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 98.88% of 2420 companies in the Hardware industry. Overall, the profitability of Arista Networks is ranked 10 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. The average annual revenue growth of Arista Networks is 22.9%, which ranks better than 88.24% of 2313 companies in the Hardware industry. The 3-year average EBITDA growth is 24.7%, which ranks better than 71.57% of 1938 companies in the Hardware industry.
ROIC vs WACC
Comparing a company's return on invested capital to the weighted average cost of capital can help determine its profitability. 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 12.95.
Conclusion
In conclusion, the stock of Arista Networks (ANET, Financial) shows every sign of being fairly valued. The company's financial condition is strong and its profitability is robust. Its growth ranks better than 71.57% of 1938 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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