Question: Why would you pay 33 times earnings for Amazon stock (NASDAQ: AMZN) when you can buy Arista Networks stock at 36 times earnings? It wouldn’t make much sense, especially when considering these three key points:
- Growth: Arista’s revenue has been growing at an impressive rate of 34% annually for the past three years, while Amazon’s growth rate is about 11%.
- Margins: Arista enjoys operating cash flow margins of over 50%, meaning a greater share of revenue growth turns into actual cash. In comparison, Amazon’s operating cash flow margins are roughly 17%, so even with growth, a smaller slice turns into cash.
- Financial Stability: Arista maintains a very strong financial position, with no debt and a high cash-to-assets ratio of 59%. This contrasts sharply with Amazon, which has a 7% debt-to-equity ratio and holds only 16% of its assets in cash. These figures clearly demonstrate that Arista possesses significantly greater financial stability compared to Amazon.
Separately, see – What Sparked UNH Stock Crash?
Is ANET Stock A Safe Bet?
Now, Arista isn’t exactly a safe haven, as its past behavior during market shocks demonstrates. For instance, ANET stock fell 38.4% during the 2022 inflation shock, a much steeper drop than the S&P 500’s 25.4% peak-to-trough decline. Similarly, it lost 34.0% during the 2020 Covid-19 pandemic fall, matching the S&P 500’s 33.9% fall.
So, while it’s not a ‘safe’ stock, it has already taken significant damage, dropping from around $130 in January to roughly $90 today. In contrast, if you seek a more even-handed approach, consider the Trefis High Quality strategy, which has outperformed the market with over 91% returns since inception, as evident in its performance metrics.
A Networking Infrastructure Provider
Arista builds the essential networking gear that powers the internet, especially for big companies running cloud computing and AI. If you believe that cloud and AI will keep growing, then Arista could be a good long-term investment. Arista supplies the critical tools needed for the AI and cloud computing boom. This means you don’t have to guess which major tech company—like Microsoft, Amazon (AWS), Google, or Meta—will win the AI race. All of them are spending massive amounts of money—hundreds of billions collectively—on data centers, and a part of that money goes toward the kind of high-performance networking equipment Arista specializes in. Also, see – Buy or Sell ANET Stock.
What Could Go Wrong?
Arista’s earnings might disappoint, and sales growth could slow from 20% last year to around 15% in the near term as companies focus on saving cash. Then there’s always the unexpected and unimagined. Definitely do not touch this stock if you can’t withstand a 40% downside from current levels. The worst thing you could do is sell at that point. Instead, talk to an advisor who has seen four bear markets in the last 30 years and ask about the Trefis HQ strategy and other clever ways to take advantage of a market downturn. A key insight: much money is made in this market if you don’t lose your composure. All in all, if you’re a long-term investor looking to invest and forget for the next 3-5 years, ANET stock right now could be an interesting entry point.
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