Arista Networks Inc. (ANET, Financial) provides cloud networking solutions to data centers. Founded in 2004, the Santa Clara, California-based company focuses on high-speed applications. Among its customer base are several Fortune 500 global companies, including Microsoft Corp. (MSFT, Financial) and Meta Platforms Inc. (META, Financial).
On Monday, the technology company released very strong second-quarter financial results.
Shares of Arista Networks have gained nearly 48% year to date. I believe the latest earnings report has a good chance of sending the shares even higher as its valuation is attractive and its fundamentals are very strong.
Impressive financial results
For the three months ended June 30, Arista Networks reported GAAP earnings of $1.55 per share, topping estimates by 28 cents, and revenue of $1.46 billion, beating expectations by $81.31 million.
In a statement, President and CEO Jayshree Ullal said, "Arista again achieves record revenue and profitability for Q2 2023.” She added that its "customers now represent more than 75 million cumulative cloud networking ports."
Further, Chief Financial Officer Ita Brennan said, “In spite of the return to shorter lead times and reduced visibility, we are executing well with gradual incremental improvements to our 2023 outlook, which now calls for year-over-year growth in excess of 30%.”
Arista reported a year-over-year increase of 38.70% in revenue, a GAAP gross margin of 60.6%, down from 61.2% last year, and GAAP net income of $491.9 million, or $1.55 per diluted share, compared to GAAP net income of $299.1 million, or 94 cents per diluted share, in the prior-year quarter.
The only negatives were a year-over-year increase in total operating expenses and the minimal contraction of the GAAP gross margin compared to last year.
Strong fundamentals and attractive valuation
Tech stocks have totally defied the macroeconomic environment of rising interest rates, worries about a hard landing of the economy and even the fear of an economic recession. Arista Networks has performed very well year to date. Looking at its fundamentals and valuation, it is no wonder why.
The stock trades with a price-earnings ratio of 32.31, a price-sales ratio of 10.08 and a price-book ratio of 8.92, having closed at $155.09 on July 31. The PEG ratio of 1.09 is very close to the threshold value of 1, as values below it are indicative of undervaluation. Over the past 12 years, Arista Networks's highest PEG ratio was 2.90, the lowest was 0.49 and the median was 1.18. The PEG ratio is the first indication that the valuation is attractive.
This is further supported by a GF Value of $177.39, which indicates the shares are modestly undervalued based on its historical ratios, past financial performance and analysts' future earnings projections.
High-quality metrics
Among the things investors may find attractive about Arista Networks is its high profitability rank of 10 out of 10, a high rank for financial strength at 8 out of 10, another perfect rank for growth and a very high rank for momentum. The combination of these ranks, along with a value rating of 7, makes the tech stock appealing due to its very high-quality features. As such, it has a nearly perfect GF Score of 99 out of 100.
Further, the company has been profitable over the past 10 years and its net margin is ranked better than 97.55% of 2,412 companies in the hardware industry. I like that Arista had a net margin of 15.25% in 2018 and managed to double it to 30.87% by 2022.
Arista Networks' operating margin is also expanding, which is always a very good sign. For 2022, the operating margin of 34.86% was the highest for the period between 2013 and 2022. It is also ranked better than 99.05% of its competitors. This is exceptional profitability.
Financial strength and growth
Arista Networks also has solid financial strength. The Altman Z-Score of 15.43 is strong, the Piotroski F-Score of 7 out of 9 is indicative of a very healthy situation and the debt-to-equity ratio of 0.01 is very low. At the same time, the cash-to-debt ratio of 60.25 shows the company has more than enough cash to cover all of its debt. Its financial situation is very stable.
Turning our attention to growth, Arista Networks has a three-year revenue growth rate of 22.9%, a three-year Ebitda growth rate of 24.7% and a three-year book growth rate of 18.9%.
In a nutshell, this tech company has reported stellar financial results, and its fundamental analysis shows it has potential for further upside. I could hardly find any negative key metrics, which is the best scenario for a bullish outlook.
