We've been asking ourselves recently if the market has placed a fair valuation on Arista Networks. Let's dive into some of the fundamental values of this large-cap Telecommunications company to determine if there might be an opportunity here for value-minded investors.
Arista Networks Has Elevated P/B and P/E Ratios:
Arista Networks, Inc. develops, markets, and sells cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. The company belongs to the Telecommunications sector, which has an average price to earnings (P/E) ratio of 18.85 and an average price to book (P/B) ratio of 3.12. In contrast, Arista Networks has a trailing 12 month P/E ratio of 32.8 and a P/B ratio of 9.22.
Arista Networks's PEG ratio is 2.62, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
An Exceptionally Strong Balance Sheet:
| 2019-12-31 | 2020-12-31 | 2021-12-31 | 2022-12-31 | |
|---|---|---|---|---|
| Revenue (MM) | $2,411 | $2,318 | $2,948 | $4,381 |
| Gross Margins | 64.1% | 63.9% | 63.8% | 61.1% |
| Operating Margins | 33.4% | 30.2% | 31.4% | 34.9% |
| Net Margins | 35.67% | 27.38% | 28.52% | 30.87% |
| Net Income (MM) | $860 | $635 | $841 | $1,352 |
| Net Interest Expense (MM) | 51 | 27 | 7 | 28 |
| Net Interest Expense (MM) | $51 | $27 | $7 | $28 |
| Depreciation & Amort. (MM) | -$33 | -$45 | -$50 | -$63 |
| Earnings Per Share | $2.66 | $2.0 | $2.63 | $4.87 |
| EPS Growth | n/a | -24.81% | 31.5% | 85.17% |
| Diluted Shares (MM) | 324 | 318 | 319 | 306 |
| Free Cash Flow (MM) | $947 | $720 | $951 | $448 |
| Capital Expenditures (MM) | -$16 | -$15 | -$65 | -$45 |
| Net Current Assets (MM) | $2,181 | $2,418 | $3,057 | $3,661 |
| Current Ratio | 5.81 | 4.99 | 4.34 | 4.29 |
| Net Debt / EBITDA | -1.1 | -1.01 | -0.57 | -0.38 |
Arista Networks has growing revenues and increasing reinvestment in the business, strong margins with a stable trend, and an excellent current ratio. The company also benefits from low leverage, wider gross margins than its peer group, and a strong EPS growth trend.
