Arista Networks plunges after reporting “sudden and severe” decline in demand

Arista Networks

Cloud-computing stocks used to be the talk of Wall Street, but recently many of these tech companies have suffered significant declines. One of these is cloud giant Arista Networks (NASDAQ: ANET), a $14.2 billion business that saw its market value dive by almost 25% after announcing what it called a “sudden and severe” decline in demand from the cloud computing sector.

Shares of Arista ended up reaching a 2-year low after announcing disappointing revenue expectations. The company said that it expects Q4 revenue to come in between $540 million and $560 million, a significant drop from Wall Street’s expected $686 million. Already a number of analysts have responded to the news with downgrades.

“Naturally, this type of volatility brings a sudden and severe impact to our Q4 guidance. Given this tepid forecast and volatility of this cloud segment, we believe the cloud titan forecast should be modeled as flat to down in calendar 2020,” said Chief Executive Jayshree Ullal said on the post-earnings conference call with analysts. “However, we were recently informed of a shift in procurement strategy with a material reduction in demand from a second cloud titan, reducing their forecast dramatically from original projections for both Q4 2019 and for calendar 2020.”

Back in Q3 2019, Arista reported revenues of $654.4 million, slightly edging out analyst expectations. Net income had grown by 24% to $208.8 million, performance that was quite strong. This sudden reversal in financial results, however, is seen as quite worrying for the company.

Out of 30 analysts polled in a recent survey as reported by MarketWatch, 7 have initially responded by downgraded Arista’s stock in response to this announcement, while another 16 have decided to cut their price targets although keeping their ratings intact. One of these analysts who cut their ratings, Samik Chatterjee from J.P. Morgan, went on to say to clients that the way forward for Arista seems quite difficult in the next 12 months. Higher than expected revenue volatility in the cloud sector as well as a lack of visibility on how the company can steadily grow aren’t helping the company at all.

Most analysts polled regard Facebook (NASDAQ: FB) as the reigning king of the cloud computing world, and that Arista is quite far below its competitor in more ways than one. While Microsoft (NASDSAQ: MSFT) is also heavily involved in the cloud computing space, the social media giant’s cloud division seems to have an edge over the market at the moment.

In response to the news, shares of Arista fell by 24.2% in response to the news, hitting a 2-year low in the process. With more uncertainty surrounding the stock than ever, no one will know for sure where Arista will go in the next 12 months.

Arista Networks

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific. – Warrior Trading News