Arista Networks (NYSE: $ANET) is a pioneer in software-driven solutions for cloud networking for large data centers and cloud computing. The company is renowned for its multilayer network switches that deliver software-defined networking (SDN), often used in high-frequency trading and high-performance computing.
Arista Networks released its Q4 fiscal 2023 results on Monday, February 12, 2024, after markets closed. Despite topping revenue and earnings estimates, the stock tumbled during after-hours trading.
Arista Networks Q423 Results
In Q4, Arista Networks reported an adjusted EPS of $2.08, above the analysts’ estimate of $1.71 and better than last year’s EPS of $1.41 in the same quarter. The EPS was 21.64% better than expected, which means ANET stock has beaten EPS estimates 100% of the time in the past four quarters.
Net income in Q4 rose to $613.6 million, compared to $427.1 million in Q422, and the GAAP gross margin also improved to 64.9% in the quarter compared to 60.3% in Q422.
In the fourth quarter, Arista Networks posted a revenue of $1.54 billion, beating analysts’ estimates of $1.53 billion by 0.66%. It was also better than the $1.28 billion in revenue reported a year ago. In the past four quarters, Arista Networks has beaten revenue estimates 100% of the time.
Full-year revenue increased 33.8% to $5.86 billion, while FY net income increased 54.3% to 23.09 billion. The full-year GAAP gross margin also increased to 61.9%, compared to 61.1% in FY22. Adjust EPS for the full year was $6.94 compared to $4.58 in FY22.
Lukewarm Q1 Forecast
For the first quarter of fiscal 2024, Arista Networks forecast revenue of $1.52-$1.56 billion, above estimates of $1.53 billion at the midpoint. However, the adjusted gross margin forecast of 62% was below analysts’ estimate of 62.7% and below the Q423 adjusted gross margin of 65.4%.
Operating Expenses Rise
Even as sales have increased throughout 2023 due to high demand for Arista Networks’ products, operating expenses have continued to rise. The company’s operating expenses increased to $359.31 million in the fourth quarter compared to $299.69 million a year ago. Meanwhile, operating expenses rose to $1.37 billion for the full year, compared to $1.15 billion in fiscal 2022.
Arista Networks Stock Performance
The gross margin forecast by Arista Networks and rising operating expenses overshadowed its revenue and earnings beat in the quarter. During after-hours trading, the stock lost 8.84% of its value, dropping to $256.00 per share. At the close of trading on Monday, February 12, 2024, the stock was valued at $280.88 per share, losing 0.56% of its value during the session.
As of Monday’s closing price, the stock was up 19.9% year-to-date, outperforming the S&P 500, which has gained 5.4% YTD.
ANET Stock Forecast
As of Monday’s closing bell, Arista Networks was rated a strong buy. The analysts predict a broad range for the stock in the next 12 months, with the most bullish expecting $325, while the most bearish expecting $250. ANET’s average stock price forecast is $289.85, a 3.19% upside based on the last closing price.
The Case for ANET Stock
Arista Networks has quickly reacted to the rise of AI and cloud computing, positioning itself as a key player. It currently counts as major supplier in the field, with Meta and Microsoft, amongst its clients, as they seek to expand their AI capabilities.
AI adoption will undoubtedly positively impact the company’s revenue, contributing to stock growth. Its current cautious approach to expected revenue from AI may be due to a delay in deployment of the Ethernet infrastructure needed for backed AI computing clusters.
However, these are temporary and surmountable hurdles. Consequently, the stock will continue rising in the medium and long term as cloud computing and AI infrastructure become ubiquitous. Based on this assessment, the strong buy rating for ANET stock accurately represents its medium- and long-term performance.
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