Shares in cloud networking company Arista Networks (NYSE:ANET) have slipped 9% over the past three weeks. Coming just after a surge to start off November after record quarterly earnings followed by a one-for-four stock split, this may just be an opportunity to jump onboard a high-flying cloud computing company at a discount.
Even after the current dip, ANET stock has delivered a 76% return so far in 2021 (on a split-adjusted basis). The company is seeing its business ramp up post-pandemic, and ANET has been gaining momentum … or it had been until this dip.
Complicating the equation for this Portfolio Grader B-rated stock its big move at the start of November. After a month of steady gains, ANET stock shot up 20% in a single session.
In this era of meme stocks, surges like this attract suspicion. Let’s have a closer look at what’s been going on with Arista Networks over the past five weeks or so and the impact that has had on ANET stock.
When I’m done, you should have a better idea of whether you want this company in your portfolio.
Q3 Earnings Continue Arista Networks’ Earnings Beat Streak
The big gains by ANET stock at the start of November were driven by the company’s third quarter earnings. Arista Networks delivered record quarterly results. Revenue of $748.7 million was up 23.8% year-over-year. Earnings were $2.96 per diluted share, compared to $2.42 in the year ago quarter. Those earnings beat Wall Street expectations — for the fourth straight quarter.
The company’s CEO noted: “We are experiencing strong demand for our pioneering client to cloud networking portfolio across all of our customer sectors.”
In addition, Arista Networking announced a stock split. The combination of the earnings win and the stock split resulted in ANET stock closing up 20% on the day. The rally continued for several days, with shares closing at $132.64 on Nov. 5. By mid-November, the slide had begun.
Cloud Computing Is a Huge Market
For an idea of Arista Network’s long-term growth potential, you need to look at the cloud computing market. Arista doesn’t operate cloud data centers, but it supplies critical, highly specialized equipment to companies that do. Switches, routers and Wi-Fi access points.
The cloud computing market has been touted for its massive growth potential for years.
A decade ago — when the industry was still in its early stages — 0Illinois University business professor Michael J. Shaw called cloud computing a game-changer for business. He predicted “it’s going to evolve into something that’s going to be here to stay for the long-term. It’s a model that comes from several developments – access to computers, better networking and the need of the consumer and enterprise users.”
At this point, there’s no question that cloud computing is here to stay. And it will continue to grow. A Grand View Research report published in September put the value of the cloud computing market by 2028 at over $1.25 trillion with a CAGR of 19.1%.
Obviously, Arista Networks’s share of that total pot is miniscule. But the growth will have a trickle-down effect. Companies that are expanding their data centers will need to buy more switches and routers. The expanding cloud computing market bodes well in terms of long-term growth for ANET stock.
Bottom Line on ANET Stock
If you’re still feeling slightly uncertain about the current ANET stock situation, you’re not alone. Investment analysts currently have mixed feelings about the company. For example, among the analysts tracked by CNN Business, ANET there is a consensus “hold” recommendation, but it’s by a very narrow margin. The analysts’ median 12-month price target of $134.50 offers nearly 7% upside.
I don’t think there’s any question about whether the cloud computing market is set for continued growth. I think the “hold” rating reflects a caution about whether Arista Networks’ business will be harmed in the short term by the surging Omicron Covid-19 variant. There is also some natural caution so soon after ANET’s stock split.
The bottom line is that Arista Networks is in a good position to take advantage of the continued growth in the cloud computing market. ANET stock is on a long-term growth track. However, there are some variables in play at this moment that could result in the current pullback continuing. The long-term growth picture for ANET looks pretty convincing. Whether you choose to invest now — taking advantage of the dip — or you wait for signs of a rally, this stock would be a good pick for adding cloud computing exposure to your portfolio.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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