Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Does Arista Networks make money in the Cloud?

Arista Networks (NYSE: ANET) could be one of the best ways of investing in the cloud.

To explain, Arista (ANET) builds the switches that enable the cloud to move massive amounts of data. For instance, the Arista 7800R can move up to 460Tbps (Terabits Per Second). A Terabit is one trillion bits per second. Thus, the 7800R could move 460 trillion bits of data a second.

How Arista Makes Money in the Cloud

Arista’s switches enable cloud networking and the cloud to operate. Arista offers both hardware and software solutions for the cloud. For example, the Arista Extensible Operating System (EOS) is a Linux based operating system for data centers and cloud networks.

The EOS creates an opening network model that supports many kinds of software. For instance, a bank could use the Arista EOS to run its data center and servers and support its payment solutions.

Thus, Arista has some value characteristics because it builds the infrastructure upon which the cloud operates. Consequently, Arista Networks (ANET) could show us if the cloud makes money.

Does Arista Networks Make Money?

Arista Networks (NYSE: ANET) makes money in the cloud. For instance, Arista reported a quarterly operating income of $194.64 million on 31 December 2020.

Arista also reported a quarterly gross profit of $414.58 million on the same day. The quarterly operating income grew from $175.99 million on 31 December 2019. The quarterly gross profit grew from $356.40 million on 31 December 2019.

However, Arista has a limited moneymaking capacity because its revenues are small. Arista reported $648.48 million in quarterly revenues on 31 December 2020. The quarterly revenues grew from $552.55 million on 31 December 2019.

Is Arista Networks a Growing Company?

Stockrow estimates that Arista’s revenues grew at a rate of 17.36% in the quarter ending on 31 December 2020. Arista experienced four quarters of revenue shrinkage between December 31, 2019, and 30 September 2020.

Hence, it is hard to tell if the COVID-19 pandemic affects Arista’s growth capacity. I think many companies deferred infrastructure purchases because of the pandemic.

However, the same companies need more cloud capacity because of the pandemic. Organizations need bigger clouds because more people are working remotely (at home).

How Much Cash Does Arista Networks Generate?

Arista Networks (ANET) shows the cloud can generate some cash. Arista reported a quarterly operating cash flow of $186.92 million on 31 December 2020.

The quarterly operating cash flow fell from $327.16 million on December 31, 2019. In comparison, Arista reported a -$77.13 million quarterly ending cash flow on 31 December 2020. The quarterly ending cash flow fell from $16.02 million on 31 December 2019.

Arista can generate enormous amounts of cash. It reported a quarterly ending cash flow of $765.64 million on 31 March 2020. Arista borrows some money, it reported a quarterly financing cash flow of $12.06 million on December 31, 2020.

Arista had $2.973 billion in cash and short-term investments on 31 December 2020. The cash and short-term investments grew from $2.724 million on 31 December 2019.

What Value Does Arista Networks Have?

Arista Networks (NYSE: ANET) had some value in the form of $4.739 billion in total assets on 31 December 2020. The total assets grew from $4.185 billion on 31 December 2019.

I think Mr. Market grossly overvalued Arista at $282.12 on 25 February 2021. I cannot see how a company with $4.739 billion in total assets can be worth $282.12 a share.

On the other hand, Arista offers enormous growth potential. Its share price grew from $213.75 on 24 February 2020. Thus, I advise investors to avoid Arista because I think it is bubbling.

I believe ordinary investors need to avoid Arista because the only potential value there is growth. Arista does not even pay a dividend.

The Cloud is Growing

Investors need to watch Arista Networks because the cloud is growing. Gartner estimates global public cloud spending grew by 6.3% to $257.9 billion in 2020. estimates that cloud expenditures account for 60% of IT infrastructure and 60% to 70% of all software services and technology spending in 2020.

In conclusion, I think Arista will grow, but I cannot picture its growth justifying the $282.12Mr. Market paid for it on 25 February 2021. However, Arista is in an excellent position to profit from the cloud.

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