The stock of Arista Networks Inc (ANET, Financial) has seen a daily gain of 9.58% and a 3-month gain of 23.48%. With an Earnings Per Share (EPS) of 5.41, it raises the question: Is the stock fairly valued? This article delves into a detailed valuation analysis of Arista Networks Inc (ANET) to answer this very question.
Introduction to Arista Networks Inc (ANET, Financial)
Arista Networks is a networking equipment provider that primarily sells Ethernet switches and software to data centers. Its marquee product is its extensible operating system, or EOS, that runs a single image across every single one of its devices. The firm operates as one reportable segment. It has steadily gained market share since its founding in 2004, with a focus on high-speed applications. Arista counts Microsoft and Meta Platforms as its largest customers and derives roughly three quarters of its sales from North America.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $192.56 per share and the market cap of $59.60 billion, Arista Networks stock shows every sign of being fairly valued. Because Arista Networks is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength of Arista Networks
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Arista Networks has a cash-to-debt ratio of 72.36, which is better than 89.53% of 2369 companies in the Hardware industry. The overall financial strength of Arista Networks is 8 out of 10, which indicates that the financial strength of Arista Networks is strong.
Profitability and Growth of Arista Networks
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. 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 98.82% of 2449 companies in the Hardware industry. Overall, the profitability of Arista Networks is ranked 10 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Arista Networks is 22.9%, which ranks better than 88.14% of 2327 companies in the Hardware industry. The 3-year average EBITDA growth rate is 24.7%, which ranks better than 71.68% of 1956 companies in the Hardware industry.
ROIC vs WACC Analysis
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Arista Networks's return on invested capital is 52.3, and its cost of capital is 13.53.
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 strong. Its growth ranks better than 71.68% of 1956 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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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
