Three months ago, even though firms such as Intel (INTC) , Nvidia (NVDA) , Micron (MU) and Western Digital (WDC) had signaled their sales to cloud giants weakening amid a capital spending slowdown and inventory corrections, Arista Networks (ANET) said demand from companies it refers to as "cloud titans" remained healthy. But on Thursday, it sang a very different tune.
Arista, a major supplier of data center switches and other networking hardware, is down about 12% after -- in addition to reporting roughly in-line first-quarter revenue and an EPS beat -- it guided for second-quarter revenue of $600 million to $610 million, below a consensus analyst estimate of $639.6 million. Arista's guidance midpoint implies 16% annual revenue growth, a major slowdown from first-quarter's 26% growth.
Echoing remarks from other suppliers to cloud giants, Arista said on its call that "massive cloud titan providers fulfilled in 2018 have led to a period of absorption in the first half of 2019," while adding that one cloud titan "has placed most orders on hold for Q2 2019." Microsoft (MSFT) and Facebook (FB) are known to be major Arista clients, and the company is also believed to sell to many other large web/cloud service providers.
Given that Arista is hardly alone in seeing softening cloud demand, the company's second-quarter outlook isn't something to panic over. And given that the proverbial cloud titans are still generally seeing strong revenue growth and remain committed to making big data center investments to support everything from cloud infrastructure services to online video services to AI/machine learning algorithms, it wouldn't be surprising to see their orders rebound during the second half of the year.
Moreover, Arista still reports seeing healthy demand from financial services firms and other enterprise clients, and -- though it's worth keeping an eye on efforts by cloud giants to develop their own switches -- looks poised to continue gaining share in the coming years. The company's success at selling hardware that can simplify network architectures by combining switching and routing functions has helped its cause, and so has its rollout of switches featuring very low latencies (important for both cloud giants and financial firms) and its development of a powerful software platform for its hardware.
That said, though it's not terribly expensive, Arista's stock isn't especially cheap at current levels either. The company currently sports an enterprise value (market cap minus net cash) equal to about 21 times a 2020 free cash flow (FCF) consensus of $882 million. And that FCF estimate could drop some as more analysts react to the company's second-quarter outlook.
With Arista's stock having gone into earnings up over 75% from its December lows, it wouldn't be surprising to see additional profit-taking in response to its second-quarter outlook. However, once the dust settles, there could be a buying opportunity for a company that has been steadily taking data center networking share and remains well-exposed to cloud giants that should grow their capital spending at a healthy clip over the long run.