Arista Networks (ANET) is building its base as its stock recovers from the market sell-off in early August. In the long term, Arista stock has been trending up since December 2022.
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The Rise from the Panic Trough and the Bull Market Still Building
The company designs and sells network switches and routers used in large internet data centers, cloud, high-performance computing and high-frequency trading environments.
Large cloud computing networks require more bandwidth to serve artificial intelligence data servers. Computing networks are calling for a new level of Ethernet networking technology. Ethernet connects devices together over a wired network. In the second quarter, Arista Networks introduced its new Etherlink AI platform to control congestion, speed up deployment times and enhance operational stability.
Arista’s largest customers include Microsoft (MSFT) and Facebook parent Meta Platforms (META). Arista is developing its own Ethernet data center network switch, the Nvidia X800, so it may have to compete with artificial intelligence giant Nvidia (NVDA).
The IBD Big Cap 20 stocks are ranked #1 out of 14 stocks in the Computer Networking industry group, which is ranked #23 out of 197 IBD industry groups.
Arysta shares recover
The IBD 50 stocks have formed a cup-shaped base with a buy point at 376.50, which is also the all-time high recorded on July 9. The stock is trading sideways and trading volume is declining as it awaits the next catalyst.
Arista’s shares soared after the company reported better-than-expected second-quarter adjusted profit and sales on July 30. The company also issued a better-than-expected third-quarter revenue outlook.
The company’s shares had a few volatile days, including during the market sell-off in early August, but have since recovered.
According to MarketSurge pattern recognition, Arista’s stock is in its seventh base since December 2022, and has risen 150% since the first base formed. However, Arista’s current base is still in its early stages, as the stock price plummeted in April, dropping below its previous base and resetting the base count.
Revenues are growing, but the pace is likely to slow
The data center hardware company’s second-quarter profit rose 33%, following gains of 48% and 39% in the previous two quarters.
Arista expects third-quarter revenue to be in the range of $1.72 billion to $1.75 billion, compared with $1.509 billion in the same period last year.
Profit growth is expected to continue to slow, growing 13% in the current quarter and declining 1% in the fourth quarter, according to FactSet forecasts. Profit growth is expected to resume over the next two quarters, increasing by an average of 8%.
Analysts recently raised their full-year earnings growth forecasts to 19% in 2019 and 14% in 2025, respectively. Arysta has delivered steady annual earnings growth at levels between 22% and 69% in six of the past seven years.
Mutual funds have been buying more shares of Arysta, holding 2,800 shares in June, up from 2,755 in March and 2,586 in December, according to MarketSurge. Some of the best-performing stocks in the IBD Mutual Fund Index have sizeable holdings: JPMorgan Large Cap Growth Fund (SEEGX) held 3.19 million shares in June, and Fidelity Contrafund (FCNTX) held 2.94 million shares.
Arista stock maintains a near-perfect 98 Composite Rating and EPS Rating.
For more stock market news, follow Kimberley Koenig on Twitter @IBD_KKoenig.
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