If you haven’t heard of Arista Networks (ANET), consider this to be the warning shot of a fresh company in the super powered space of cloud networking. ANET has been trading publicly since 2014 and been serious about promoting its proprietary tools including the Extensible Operating System (EOS™) and cheaper alternatives to the hardware that caters to cloud networking. I think this is a great company to invest in, but I also have a few concerns…and I’m semi broke so my price range on investments is etched in stone until further notice.

Company Snapshot
Ticker Symbol: ANET
Current Price: $133.87 (As of close 4/6/2017)
52 Week Low: $60.51
52 Week High: $134.65
Dividend (Yield): N/A
EPS: 2.49
P/E Ratio: 53.98

The Good
Arista is growing aggressively (peep the lack of dividend). There is no denying that. The Extensible Operating System, which they have built from nothing using innovative technology, has been the cash cow since 2004. ANET is fully able to generate cash as their revenue and earnings have close to doubled since the company was first publicly traded almost 3 years ago. They have also been taking market share from Cisco Systems, which is considered the leader in the network space. Both of these points make ANET a prime candidate for acquisition by the cash rich Cisco competitor, Hewlett Packard Enterprise.

I definitely think Arista has potential to over take Cisco per the looks of their revenue growth and how much of the market share they have already taken. Seems like customers are happy with the products and especially happy with the pricing. Not much beats a happy customer and profitable products.

The Bad and Ugly
As with anything that’s this far out of my personal price range, I wonder how much more room this has to grow price wise. The price has already doubled from April 5, 2016 to April 5, 2017. Will it grow further before a major correction? I guess you could say the price double that put it out of my price range forces me to proceed with caution with eyes open for “the catch”.

One thing I noticed was a loss in the cash flow statement for 2016, where the cash on hand decreased by $119.4 million. Arista has been in some steep legal struggles with another super power in the routers/switches world, Cisco Systems, for about 2 years. I found an article that spells out pretty well the timeline of the disputes and how the problems may have finally ended between the two companies, but it is still a concern for me. The International Trade Commission (ITC) ruled that Arista did in fact infringe on Cisco’s patents in September 2015. Also with the fact that Arista’s president and CEO Jayshree Ullal spent 15 years as an executive at Cisco concerns me as well. These disputes weren’t just about business, these disputes were personal.

Which leads me to this last point of how Cisco, as well as other competitors like Juniper Networks, will try to come for Arista in the future. Cisco recently decided to sell software without having customers buy the hardware to go along with it. I wrote about Cisco a while ago, but almost half of their business comes from their hardware business. So as Cisco looks to evolve, they seem poised to spend cash to keep up with the moves Arista is making. According to the first quarter 2017 outlook, Juniper is revamping their service offerings to generate more revenue despite network product sales decreases over the past 3 years.

Overall, if I had the money to buy into Arista, I’d probably place my order on the closing bell of May 3rd before the 1st quarter results come in on the 4th. I just want to see if the legal issues pan out and if Cisco’s defense has remotely slowed the growth Arista is seeing. Until next post folks…