Here’s what makes Arista Networks a strong bet

We think that Arista Networks Inc. is currently a better choice compared to NetApp Inc.. ANET stock is trading at just over 15 times trailing earnings, well above NetApp’s 3.4 times multiple. Does this gap in company valuations make sense? We believe so and expect it to increase even more. While both companies have seen a steady increase in revenue since lockdowns began to be lifted, NetApp revenue has struggled for the past five years, while Arista Networks

has experienced more consistent sales growth. Arista’s revenue has grown steadily year-over-year from $ 1.1 billion in fiscal 2016 to $ 2.3 billion in fiscal 20, LTM’s revenue s’ currently amounting to $ 2.6 billion. In comparison, NetApp’s revenue growth has been uneven, with revenue growing first from $ 5.5 billion in fiscal 2017 to $ 6.1 billion in fiscal 2019, and then to $ 6.1 billion in fiscal 2019. $ 5.4 billion in fiscal year 20 and to $ 5.7 billion in fiscal year 21 (NetApp’s fiscal year ends April). Additionally, Arista’s LTM operating margins currently stand at 30.8%, higher than NetApp’s 19.4%.

That said, there is more to the comparison, which makes Arista Networks a better bet than NetApp, even at these ratings. Let’s step back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating profit and operating margin growth, as well as financial condition. Our dashboard NetApp vs. Arista Networks: Industry Peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.

1. Arista Networks is the clear winner in revenue growth

Arista Networks recorded compound revenue growth of 12.1% in the past three years, compared to NetApp compound revenue growth of -1% in the same period. Even for the most recent quarter (Q2 ’22 for NetApp and Q3 ’21 for Arista), Arista’s revenue grew 30.8%, compared to growth of 11.9% for NetApp.

NetApp is a larger company with revenues on an LTM basis of $ 5.9 billion, more than double Arista’s of $ 2.6 billion.

2. EBIT margins: Arista experienced stronger growth

Arista’s operating margins are 30.8% on an LTM basis, higher than NetApp’s 19.4%. Arista’s EBIT margins have increased from 12.7% in fiscal 2018 to 30.2% in fiscal 20 and currently stand at 30.8%. On a comparable calendar year basis, NetApp’s margins have increased from 19.9% ​​in fiscal 2019 to 17.9% in fiscal 21, and currently stand at 19.4% . Higher profitability and faster margin growth make Arista the clear winner in margins.

3. Arista Networks is also in a better net cash position

NetApp’s debt ratio is currently 13%, compared to Arista’s current debt ratio of 0%. Additionally, NetApp’s liquidity as a percentage of assets is 49.7%, lower than Arista’s 63%. Obviously, Arista Networks has a much better cash cushion compared to NetApp.

The net of everything

NetApp’s revenue is higher than Arista Networks, but the latter has a higher EBIT margin and faster profitability growth, as well as higher historical revenue growth. Despite Arista’s 15x P / S ratio compared to NetApp’s 3x, we believe this gap is set to widen. Additionally, Arista’s P / EBIT ratio is currently over nearly 50 times, compared to NetApp’s 18 times. Given that Arista has experienced stronger revenue and margin growth lately and has a much better cash cushion, we believe this is warranted and this gap is set to widen. . As such, we believe Arista Networks stock is currently a better bet compared to NetApp stock.

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