Arista: Buy This Key Data Center Supplier

seekingalpha05-03

Arista Networks is a key supplier of efficient switches for data centers and hyperscalers like AWS and Azure.ANET has outperformed the market and most peers, with over 30% EPS growth since its IPO in ...

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href=https://seekingalpha.com/article/4689007-arista-key-data-center-supplier><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Arista Networks is a key supplier of efficient switches for data centers and hyperscalers like AWS and Azure.ANET has outperformed the market and most peers, with over 30% EPS growth since its IPO in ...</p>\n\n<a href=\"https://seekingalpha.com/article/4689007-arista-key-data-center-supplier\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE0009356076.USD","symbol_name":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A2\" (USD) 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Erik Isakson Summary The internet and the software to run everything moved to the Cloud which brought the age of data centers and hyperscalers such as AWS from Amazon (AMZN) and Azur by Microsoft (MSFT) and now AI is turbocharging this data center buildout. Arista Networks (NYSE:ANET) is a key supplier to this sector providing ever more efficient switches that connect data flowing from servers to the cloud. It is a competitive market and ANET has managed to grow above the sector in its 15-year history as a major supplier alongside Cisco Systems (CSCO) and Juniper Networks (JNPR) to name a few. Using historical and consensus data, I analyzed the company's potential and valuation and found a positive combination of growth, and profitability tempered by the current valuation. Performance I compared ANET vs selected peers and the Nasdaq (NDX) on a 5-year and 1-year time frame and found that it handsomely beat the market and most peers except for Dell Technologies (DELL) which has gotten AI data center supplier recognition. These sharp share price gains are due to over 30% EPS growth since its IPO in 2014.   ANET Performance (Created by author with data from Capital IQ) Products and Services As mentioned above and illustrated in the product image below, Arista makes complex switching and routing systems that connect servers in data centers to the cloud. The core competency is technological in the ability to develop faster more secure and reliable data flows that at the same time utilize less energy, which is becoming an issue. Key customers are the hyperscalers and many entities that require data flow. Technological obsolescence is not an issue in the medium term.   Arista Demand Drivers As you may have seen, AI has dominated the corporate and investment world in the last year and driven significant growth in computing power for Nvidia (NVDA) from hyperscalers that in turn are meeting demand from corporates that need to implement their AI services in the quest for productivity. This AI lead demand requires more and more data handling capacity, and larger flows of data moving faster require Arista equipment. The company should continue to benefit from Datacenter and AI-driven demand for some time. I compiled the historic and estimated capex of key hyperscalers and data-intensive companies to check if the market view was being translated into forecasts. As can be seen in the table and charts, capex spending is set to increase 55% from US$400bn to US$645bn in the YE24-26 timeframe and represents an increase as a percent of sales to 16% from 13%, one of the highest levels seen in the last 10 years.   Hyperscaler Capex (Created by author with data from Capital IQ)  Capex Intensity (Created by author with data from Capital IQ) Peer Comps I gathered consensus data on a large group of ANET peers, whether direct competitors or similar data center suppliers to get a sense of the market view, i.e. growth and valuation. As can be seen, ANET has a consensus price target of US$291 to YE24 for a 12% upside while the average of the peers is 9% with a notable -2% potential for Dell. On the Revenue and Earnings growth comps, ANET is in line while it is one of the few that is expected to see positive EPS growth in 2024 according to consensus. Finally, on valuation, it trades slightly below peer averages where the average PE is 47x or a 3.1x PEG.   Created by author with data from Capital IQ Valuation ANET has a current consensus price target of US$290 which backs into a target PE of 34x. Not that I used an adjusted EPS which adds back stock-based compensation. This PE in turn drives a PEG (PE to EPS Growth) ratio or relative valuation of 2.9x that is high vs the standard thought that a 1.0 is considered fair. The market is clearly willing to pay a high valuation for the stock and as seen in the peer comp section is indicative of the sector. Thus, I applied a 2.5x PEG to YE25 estimates I arrived at a US$365 price target. It's relevant to mention that the company is a high free cashflow generator, is accumulating cash (negative Net Debt) and can increase share buying back, pay dividends or accelerate growth via M&A in the near future.   Consensus Valuation (Created by author with data from Capital IQ)  Created by author with data from Capital IQ Consensus Estimates The consensus has a 9% EPS growth for 2024 after a 49% increase in 2023, which may be due to the 1Q24 guidance that was flat vs 4Q23 and led to a price correction. This may lead to surprise gains in the remaining quarters of 2024 given the accelerating capex spending of the AI-driven data center. There may be some infrastructure catch-up as fiscal space needs to be built before the hardware is installed. The longer-term growth forecast of under 10% seems low vs. historical rates and in conjunction with the very strong sector trends. The consensus dispersion bears some of this growth discrepancy with the high end closer to 20% EPS growth for 2024. In my view there ANET is doing a good job of managing expectations and could over-deliver. Finally, it is important to focus on the company's solid free cash flow generation, this is due to its high margins (45% EBITDA) and modest capex that has allowed the company to accumulate cash and begin share buybacks. Another positive aspect is the ability to expense R&D that can be deducted from taxable income vs capitalizing it and receiving a slower tax shield via depreciation.   Consensus Forecast (Created by author with data from Capital IQ)  Consensus Growth (Created by author with data from Capital IQ)  Consensus Estimates (Created by author with data from Capital IQ) Conclusion  I rate ANET a buy. The company should continue to deliver high growth as a leading supplier to the data center and AI demand that may continue for more than several years. At the same time, its network products and solutions command high margins (pricing) that generate significant free cash that so far has been accumulating and offer additional growth options. All combine, growth and profitability, to support a high and sustainable valuation.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432971986"}