One of Wall Street's biggest winners of the day is Arista Networks Inc, a communication equipment company whose shares have climbed 5.0% to a price of $112.25 -- near its average analyst target price of $107.59.
The average analyst rating for the stock is buy. ANET outperformed the S&P 500 index by 5.0% during today's afternoon session, and by 53.2% over the last year with a return of 81.5%.
Arista Networks Inc engages in the development, marketing, and sale of data-driven, client to cloud networking solutions for data center, campus, and routing environments in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. The company is included within the communication services sector, which generally includes cyclical companies whose share prices rise and fall along with macro economic cycles. One exception are telecommunications providers, which are more akin to utilities in that demand for their services remain somewhat consistent regardless of the state of the economy.
Arista Networks Inc's trailing 12 month P/E ratio is 54.0, based on its trailing EPS of $2.08. The company has a forward P/E ratio of 45.7 according to its forward EPS of $9.73 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US telecommunications companies is 20.57, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand the strength of Arista Networks Inc's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
ANET's average gross profit margins over the last four years are 63.2%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -0.6%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Arista Networks Inc's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 2,034,014 | 34,434 | 1,999,580 | 346.17 |
| 2022 | 492,813 | 44,644 | 448,169 | -52.88 |
| 2021 | 1,015,856 | 64,736 | 951,120 | 32.15 |
| 2020 | 735,114 | 15,384 | 719,730 | -24.02 |
| 2019 | 963,034 | 15,751 | 947,283 | 97.64 |
| 2018 | 503,119 | 23,830 | 479,289 |
- Average free cash flow: $924.2 Million
- Average free cash flown growth rate: 22.9 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, ANET is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Arista Networks Inc's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Telecommunications sector, which stands at 2.36 as of the third quarter of 2024.
Arista Networks Inc is by most measures undervalued because it has a higher P/E ratio than its sector average, an average P/B ratio, and generally positive cash flows with an upwards trend. The stock has strong growth indicators because it has a an inflated PEG ratio and strong operating margins with a positive growth rate. We hope you enjoyed this overview of ANET's fundamentals.
