- If you are wondering whether Arista Networks' current share price lines up with its underlying value, you are not alone. This article walks through what the numbers actually say.
- The stock trades at US$120.77 after a 7 day return of an 8% decline and a 30 day return of a 9.5% decline, set against a 1 year return of 55% and a very large 5 year gain.
- Recent attention has focused on Arista Networks as investors weigh its role in networking and cloud infrastructure. Headlines frequently link the company to ongoing demand for high performance data center and cloud solutions. This context is important because sentiment around long term technology spending and data traffic often influences how investors think about what they are willing to pay for the stock.
- On Simply Wall St's valuation checks, Arista Networks scores 4 out of 6. The next sections break down what different valuation approaches suggest today, while also pointing to a broader way of thinking about value that ties everything together at the end of the article.
Find out why Arista Networks's 55.0% return over the last year is lagging behind its peers.
Approach 1: Arista Networks Discounted Cash Flow (DCF) Analysis
A Discounted Cash Flow model takes expected future cash flows, then discounts them back to today using a required rate of return to estimate what the business might be worth right now.
For Arista Networks, the latest twelve month Free Cash Flow is about $4.30b. Analysts provide explicit forecasts for several years and Simply Wall St then extends those estimates, using a 2 Stage Free Cash Flow to Equity model, out to 2035. Under this framework, projected Free Cash Flow for 2030 is $9.06b, with later years extrapolated rather than based on additional analyst estimates.
Pulling all those discounted cash flows together, the model arrives at an estimated intrinsic value of about $155.18 per share. When compared with the current share price of $120.77, this DCF approach suggests the stock is 22.2% undervalued.
Result: UNDERVALUED
Our Discounted Cash Flow (DCF) analysis suggests Arista Networks is undervalued by 22.2%. Track this in your watchlist or portfolio, or discover 62 more high quality undervalued stocks.
Approach 2: Arista Networks Price vs Earnings
For a profitable company, the P/E ratio is a useful shorthand because it links what you pay for each share to the earnings that support that share price. It also captures what the market is willing to pay for those earnings today.
What counts as a “normal” P/E depends on how fast earnings are expected to grow and how risky those earnings appear to be. Higher growth and lower perceived risk usually justify a higher multiple, while slower or less certain earnings often point to a lower one.
Arista Networks currently trades on a P/E of 43.22x, compared with the Communications industry average of about 42.65x and a peer group average of 78.69x. Simply Wall St’s Fair Ratio estimate for Arista Networks is 39.65x. This Fair Ratio is a proprietary view of what the P/E could be given factors such as earnings growth, profit margins, industry, market cap and key risks.
Because it blends these company specific drivers, the Fair Ratio can be more informative than a simple comparison with peers or the broad industry.
Set against the Fair Ratio of 39.65x, the current 43.22x P/E suggests the shares trade somewhat above that level.
Result: OVERVALUED
P/E ratios tell one story, but what if the real opportunity lies elsewhere? Start investing in legacies, not executives. Discover our 20 top founder-led companies.
Upgrade Your Decision Making: Choose your Arista Networks Narrative
Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St’s Community page let you connect your view of Arista Networks’ story to specific forecasts for revenue, earnings and margins, turn those assumptions into a Fair Value, and then compare that Fair Value with today’s price. Each Narrative updates automatically when new news or earnings arrive. One investor might focus on Arista as a debt free “Porsche of internet switches” with a Fair Value of about US$76, while another leans toward a much higher Fair Value near US$207.07 or a more cautious view around US$149.15. You can see all of these side by side to decide which story and valuation best match your own expectations before choosing whether the current price looks high, low or about right.
Do you think there's more to the story for Arista Networks? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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