Yahoo Finance Arista Networks Stock Is Believed To Be Modestly Overvalued
- By GF Value
The stock of Arista Networks (NYSE:ANET, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $350.32 per share and the market cap of $26.7 billion, Arista Networks stock shows every sign of being modestly overvalued. GF Value for Arista Networks is shown in the chart below.
Because Arista Networks is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 11.8% over the past three years and is estimated to grow 9.45% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Arista Networks has a cash-to-debt ratio of 44.68, which is better than 86% of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Arista Networks at 7 out of 10, which indicates that the financial strength of Arista Networks is fair. This is the debt and cash of Arista Networks over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Arista Networks has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.5 billion and earnings of $8.53 a share. Its operating margin is 30.72%, which ranks better than 97% of the companies in Hardware industry. Overall, the profitability of Arista Networks is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Arista Networks over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Arista Networks is 11.8%, which ranks better than 80% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 16.1%, which ranks better than 68% of the companies in Hardware industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Arista Networks's return on invested capital is 45.93, and its cost of capital is 8.09. The historical ROIC vs WACC comparison of Arista Networks is shown below:
In summary, The stock of Arista Networks (NYSE:ANET, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 68% of the companies in Hardware industry. To learn more about Arista Networks stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
