This one’s going to sound a little familiar, but we’ll give it a quick once-over for the folks who haven’t been aboard the good ship Gumshoe for long. The Motley Fool is pitching their flagship Stock Advisor newsletter ($59/yr) with a pitch about a company that they have “bet” on with their own money.

They do that a lot, actually, the Fool has a pretty substantial portfolio of owned stocks (and, rightly, discloses that ownership when they cover a company). The headlines extol this as both a “$500K Bet” and as their $523,111 investment,” so it sounds like a bit commitment, though we don’t get much context on that point — I don’t know what the size of their investment portfolio is, or where this particular “bet” ranks in their holdings.

Here’s a taste of the tease, as we’re seeing it this week:

“I’m writing you today to talk to you about a small, California-based company that is pioneering a breakthrough technology that is enabling companies to move vast quantities of data over the Internet at lightning speeds.

“And as the world has become more and more reliant on the Internet for everyday needs, this company has seen its revenue explode. The intense demand for this technology has helped the company race from zero to $1 billion in sales in just eight years.

“In fact, many of technology’s biggest names – including Microsoft, Alphabet, and Amazon.com – are now loyal, paying customers of this company.”

And it has a female CEO who has visited Fool HQ, which might be sparking your memory cells:

“Actually, we’ve already issued 14 separate “BUY” recommendations across the various investment research services here at The Motley Fool.

“Heck, we believe in this company so much, we even invited their CEO to Motley Fool Headquarters to personally tell her how much we believe in her company and why we are staking $523,111 of The Motley Fool’s own money on their stock.”

So yes, the Motley Fool has been recommending this particular stock for several years, at least since the first time I saw them teasing the stock in the fall of 2017, and I’d say the time during which it was most aggressively touted by Tom Gardner and the Fool was in 2018 and 2019.

And the stock has done pretty well since the first teaser pitch we covered — the stock is Arista Networks (ANET), and this is how it has performed since the fall of 2017, a recent surge in the shares (thanks in part to Facebook’s reported plans for a infrastructure spending spree) has pushed it to roughly double the S&P 500’s return since then:

ANET data by YCharts

Here’s how Arista Networks describes itself, in case the name is new to you, their primary competitor is giant Cisco Systems (CSCO), but there are also smaller companies like Juniper Networks (JNPR) in the picture:

“Arista Networks pioneered software-driven, cognitive cloud networking for large-scale datacenter and campus environments. Arista’s award-winning platforms redefine and deliver availability, agility, automation, analytics and security. At the core of Arista’s platform is the Extensible Operating System (EOS™), a ground-breaking network operating system with single-image consistency across hardware platforms, and a modern open core architecture enabling in-service upgrades and application extensibility. Arista has shipped more than fifty million cloud networking ports worldwide with CloudVision™ and EOS. The Arista team is comprised of experienced management and engineering talent from leading networking companies. Arista designs revolutionary products in California and delivers them worldwide through distribution partners, systems integrators and resellers with a strong dedication to partner and customer success.”

What’s going to happen next? The stock has risen pretty nicely in recent weeks, after a strong “beat and raise” quarterly update early in August, and if you look at the long view it’s been a decent investment and is probably at a rational price now. Over the past five years, revenue growth has tallied up at more than 20% a year, earnings growth at more than 35% a year, and the shares trade at a trailing PE of about 40 and a forward PE of about 32, roughly where they were after they surged higher late last fall. That’s probably reasonable for their current growth rate (which has averaged about 20% over the past five years), and the performance over the past year has re-convinced analysts of the growth potential — back in December they were forecasting 12.5% earnings earnings growth over the next five years, but now that’s up to 19%. That puts the PEG ratio (Price/earnings/growth rate) at about 1.7 — I’d say that’s “reasonable” range, but not cheap (for a pretty strong and steady growth company, I’m willing to buy at a PEG ratio as high as 2.0… but it’s more compelling if that ratio dips lower).

The company remains quite dependent on their largest customers, the free-spending “mega cloud” companies, we know that Microsoft has been disclosed as a “More than 10% of revenue” customer every year since 2018, and Facebook has often also been cited as a major customer, and the capital spending for data center equipment in that sector can be lumpy. That lumpiness has led to the waves of euphoria and disappointment with Arista Networks in the past, but it does seem like spending is pretty robust in that area these days. That’s the biggest risk: that sudden pullbacks by their customers can wash away gains very quickly, and it’s not necessarily very predictable — that happened with Arista in 2019, when one or two major customers paused their orders and the stock was cut in half in the space of six months or so, with most of that coming in big “surprise” chunks of 20%+ after earnings disappointments. It has worked out well over time, but the stock has not ever spent much time on a smooth upward trajectory.

That’s just a general “buzz kill” reminder, though, I’m not aware of any current problems in their business. Cisco (CSCO), which reported last week, echoed Arista in being quite optimistic — the problem for Cisco and Arista and the other network equipment companies seems generally to be supply, not demand — they’ve had trouble getting all the chips and components they need, but the telecom and data center upgrades (to 5G and 400Gig, respectively), have created a pretty strong tailwind for years, boosted by increasing cloud reliance during the pandemic, and that shows no sign of trailing off on the demand side. It might come back to bite them a bit, if their customers have been overbuilding or over-ordering during this strange period of supply disruptions and that clears up and “normalizes” into a inventory glut, as is starting to happen with some chips and in some other sectors of the economy… but there’s no actual sign of that just yet.

Analysts are expecting them to report solid earnings growth this year ($4 is the EPS estimate at the moment), and the analysts have generally been pretty accurate with this one… the stock usually “surprises” by 5-10% or so, nice and orderly. What really moves the shares, though, is the commentary — the stock has cratered several times in recent years because of pessimistic forecasts, at times when their largest customers are surprising Arista by reining in their ordering for a period of time, or pausing data center construction or upgrades. That’s what has mostly caused the stock to falter over the past few years, and that inconsistency led to me getting stopped out of my position a while back, which turns out to have been a mistake.

What will happen this Fall? I dunno. Alphabet and other major tech companies have talked about tightening their belts a bit and reining in spending, but that’s been more about people and less about data centers — it seems that building out competitive cloud platforms among Amazon, Alphabet and Microsoft is unlikely to slow down anytime soon. And Arista has been saying all the right things this year about demand remaining strong… though now that Cisco and Arista have both reported, and both are strong and the market has bounced a bit off the July lows, the shares are at a fairly lofty valuation again.

We won’t likely get more meaningful info from the company until they report in early November, so Arista is likely to move on the same market sentiments that are jolting other tech stocks these days, largely, at the moment, based on frantic guessing about exactly what the Federal Reserve officials will say about interest rates at the Jackson Hole conference later this week (particularly during Chair Jerome Powell’s talk on Friday morning). If you’re trying to figure out what those Fed comments are likely to mean for the market over the next week or two, you’re as likely to get good guidance from a coin flip or a Magic 8 ball as you are from the financial media, so my unsolicited advice is not to try. We’re all guessing, and throwing those guesses into the overreaction machine that is the stock market — so probably reading Arista’s conference call transcript from a few weeks ago will, at the least, be a better use of your time than reading the latest Jackson Hole stories about inflation and interest rates, and it will certainly be a better use of your time than watching CNBC or Fox Business freaking out about whether Jerome Powell knows the price of a dozen eggs.

Have any thoughts on Arista Networks that you’d like to share? Think they’re on a sustainable path now, or will they keep being buffeted by up-and-down order flow from Microsoft and the other biggies? Will Cisco stop losing market share to Arista and fight back, or is the sector growing so fast that both can become much larger? Let us know with a comment below…

Disclosure: Of the companies mentioned above, I own shares of Amazon.com and Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.