Cloud computing at a discount

Things can change on a dime in the markets, and sometimes it can take a minute to put the market’s latest twist in context. But doing so can mean the difference between reacting blindly and trading strategically.

Networking and cloud computing company Arista Networks (ANET) was sitting pretty earlier in February when a correction hit the broad market. ANET shares had weathered a 9% intraday drop on January 30 to close down less than 1% on the day, and after the stock tested that low on January 6 (closing up on the day), it posted only one down day over the next seven on its way to an all-time high of $311.67 on February 15.

That was the day Arista released its Q4 numbers, which featured a 30-cent earnings beat ($1.71 vs. $1.41/share) and a revenue beat of $468 million vs. $458.7 million. Not bad, huh?

Arista Networks (ANET), 1/24/18 – 2/27/18.

Source: OptionsHouse

Well, the stock dropped to around $250 the next day, followed by a close below $240 two days later. Earnings were clearly good, and although the revenue number wasn’t gangbusters—by Arista standards, anyway—it was still positive. So what was going on? Some cautious forward guidance regarding cloud revenue from a company that had regularly offered more aggressive outlooks, an overall jittery market, and a stock that had just enjoyed a healthy run-up, may have been something of a perfect storm that day.

But several analysts and banks reiterated their support for the stock in the aftermath of the earnings release, some with price targets in excess of $300. One investment bank, for example, described Arista as the “best in breed company in the sector,” described themselves as “an aggressive Buyer on weakness,” and set a price target of $315.1

Another raised its price target from $270 to $300 while maintaining an “outperform” rating on the stock, with its analysts arguing the “pause” in cloud revenue will be more than offset by “excellent progress in the enterprise market and internationally.”2

Arista Networks (ANET), 4/26/16 – 2/27/18

Source: OptionsHouse

After a couple of days of quiet trading, traders heard the unmistakable sound of thundering hooves on Monday, when the stock (which has remained above its February 21 low) rallied more than 5.6% on heavy volume, pushing back to $260.

ANET shares gained 144% in 2017, and was up another 32% year to date by February 15. The chart above shows the degree to which it’s outperformed the Nasdaq 100 (NDX) over the past two years. Even after Monday’s big rally, ANET was still trading at around a 17% discount to where it was trading just eight days ago.


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1 Barron’s. Arista Gains ‘Key’ Win Against Cisco in Appeals Court, Says Piper. 2/14/18.

2 Arista Networks (ANET) PT Raised to $315 at Needham & Company; 'Buy the Dip.’ 2/16/18.