What's behind Arista Networks' (ANET) big sell-off today following its fourth-quarter earnings report and 2018 guidance? Its legal and marketing battle with Cisco Systems (CSCO) played a part, say analysts.
X On its earnings call, Arista told analysts that revenue growth from its "cloud" customers — the likes of Microsoft (MSFT), Facebook (FB) and Amazon.com (AMZN) — slowed because of a prolonged "workaround" process tied to its long-running Cisco legal battle.
Arista, a maker of computer network switches, plummeted 19% to close at 249.49 on the stock market today. Cisco gained 0.6% to 44.33. Arista stock had run-up 200% the past year before it reported earnings late Thursday.
Shares plunged Friday in the highest volume of the stock's run, which triggers a sell signal. The stock also is close to erasing a 27% gain from a breakout past a 245.75 buy point Jan. 8 as shares head to a weekly loss in the highest weekly volume since Arista went public. Investors who bought near that entry should sell. Those who have held the stock longer should consider taking profits.
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Arista has denied infringing Cisco patents but has been modifying its networking software to resolve issues.
"The cloud titan softness continued, driven by further delays in patent workaround testing for some of the more complex use cases," Tim Long, a BMO Capital Markets analyst, said in a report to clients.
Arista's fourth-quarter profit handily beat views but revenue growth of 43% to $468 million was just $4 million above expectations.
"Lesser beats are getting punished," Steven Milunovich, a UBS analyst, said in a report to clients.
Arista told analysts that product certification tied to the software workarounds will be completed for its key cloud customers in early 2018. If that's the case, cloud revenue should rebound in the first half of 2018. On the other hand, Arista's earnings call commentary set the expectation for "mid-20s" revenue growth in 2018, which is below the street's 27.5% estimate, analysts say.
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Bears argue that there's more going on than delays in the software work-around process. The guidance could reflect stiffer competition from Cisco for cloud customers, including Microsoft, Alibaba Group (BABA) and Facebook.
George Notter, a Jefferies analyst, says the bears are wrong.
"We don't believe (Arista) is seeing any particular share losses at meaningful customers," he said in a report.
Arista seems confident that its network switches will continue to be in demand for so-called "hyperscale" data centers packed with high-performing servers, and communications and data-storage infrastructure.
Andy Bechtolsheim, an Arista co-founder and board chairman, said at a Goldman Sachs tech conference on Feb. 13 that growing use of artificial intelligence software will drive purchases of specialized and high-speed data center equipment, including its network switches