Why Arista Networks Shares Are Plunging

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Cloud services provider Arista Networks Inc. (NYSE: ANET) was pummeled Friday morning following its third-quarter earnings announcement after markets closed Thursday. Shares traded down by more than 25% in Thursday’s after-hours trading session.

The company beat analysts’ consensus estimate on earnings per share (EPS), posting adjusted $2.69 compared to an estimate of $2.44. Sales, however, fell short, coming in at $557.1 million instead of an estimated $638.4 million.

The bad news came in Arista’s forecast. The company’s CEO, Jayshree Ullal, said that Arista anticipates “a sudden softening” of its business with “a specific cloud titan customer” she didn’t identify but that she hinted to be Facebook Inc. (NASDAQ: FB).

Why Facebook? It is one of two Arista customers that Ullal identified as being responsible for more than 10% of Arista’s 2019 sales. The other is Microsoft Corp. (NASDAQ: MSFT). In its second-quarter earnings report, Arista noted that Microsoft accounted for 27% of fiscal year 2018 sales.

On the company’s conference call, Ullal commented that Arista had been “recently informed of a shift in procurement strategy with a material reduction in demand.” She also said that the reduction would continue into next year.

The amount at issue is substantial. Prior to the third-quarter report, analysts were forecasting Arista’s fourth-quarter sales at $686.2 million. The company guided sales for the current quarter at $540 million to $560 million.

For its part, when Facebook reported earnings earlier this week, the company indicated its capital spending for this year will come in at around $16 billion, the low end of its expected range. Planned capex for 2020 is $17 billion to $19 billion. Facebook did not respond to a Bloomberg request for comment.

According to CNBC, Arista’s chief operating officer, Anshul Sadana, said the company expects Microsoft’s spending in 2020 to follow its usual spending pattern because “we have not been given any other message.”

If Microsoft is the Arista cloud titan that is expected to spend at its usual level, then Facebook is the titan expected to spend less. And judging by Arista’s sales forecast, a lot less.

Arista’s market cap at Thursday’s close was about $18.75 billion, and the average daily trading volume was nearly 700,000. For the trailing 12 months, Arista’s shares have dropped about 5%.

In Friday’s premarket, the shares traded down about 28% at $177.00, well below the low end of the 52-week range of $187.80 to $331.27. The 12-month consensus price target was $282.85.


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