This technology company beat analysts’ estimates by ten cents last quarter, and its market share is growing, helping the company to boast handsome sales and earnings increases for the past few years.
Arista Networks (ANET)
From Cabot Top Ten Trader
Growth stocks didn’t lead in 2016. The few times the market enjoyed intermediate-term rallies, the action was mostly in cyclical stocks and (post-election) financials. But I think growth stocks, which really haven’t done too much since mid-2014, could get a spark in 2017 as economic growth accelerates.
My top pick for next year is Arista Networks (ANET), which in many ways looks like the next Cisco. The company was built from the ground up to deal with the realities of the new networking paradigm. It has an expertise in cloud computing and data center switching technologies, which is helping it to consistently grab market share from legacy players that don’t have the cheaper/better/faster offerings of Arista.
Indeed, in the high-speed data center switching market, Arista’s market share is up to 15% (from 7% three years ago), while Cisco’s is now 53% (down from 71% three years ago). And there’s every sign that trend will continue in the quarters and years ahead.
Growth-wise, we love Arista’s solid sales and earnings growth going back for years. Sales have risen, 35%, 37% and 33% during the past three quarters, while earnings growth accelerated from 36% to 37% to 41%. And after-tax profit margins of 20% or so reveal a very healthy business.
The only hitch here is litigation that’s ongoing with Cisco, who believes Arista is infringing on some of its patents. However, late in the year, Arista got two pieces of good news on that front, one from an import panel and one from a jury, both of which pushed the stock higher. Analysts had been expecting higher costs and some possible disruptions, but as the litigation worry fades, growth expectations are moving higher.
Best of all, long-term, it looks like ANET has just emerged from a big, two-year, post-IPO base, with shares finally topping their 2014 high in late-November. As companies open up their wallets next year, I think Arista’s bottom line could surprise on the upside, attracting more and more big investors (437 now own shares, versus 318 a year ago) and driving the stock higher.
Michael Cintolo, Cabot Top Ten Trader, www.cabot.net, 978-745-5532, December 23, 2016