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 with Stock 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 “Our $523,111 bet,” so it sounds like a big commitment, though we don’t get much context on that point — I don’t know what the size of the Fool’s investment portfolio is, or where this particular “bet” ranks in their holdings. I do know they’ve apparently held that “bet” for a long time — it was teased as a $280,000 bet when they first recommended the stock back in 2017, and roughly doubled to $523,111 in their “double down” ads in 2018, and that’s the level they’ve used in similar ads over the past five years… so perhaps they’re still just sitting on the same shares they bought in 2017 and 2018.

Here’s a taste of the tease, as we’re being asked about 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 (when their push probably helped the shares to trade at 70-100X earnings for a while). Interestingly enough, either they’re getting lazy in updating their ads or they haven’t been re-recommending the stock recently — as of early 2020 they said they had issued 12 “buy” recommendations on this stock across Motley Fool services, and as of last August it was at 14 “buy” recommendations… a number they seem to still be stuck at today, half a year later.

The other numbers remain quite stale as well — the “eight years to a billion dollars in revenue” remains true, but that was level was breached many years ago now, Arista’s trailing revenue for the past four quarters is just short of $4 billion.

The stock has had its ups and downs, but is currently looking pretty solid as a long-term performer — the company is Arista Networks (ANET), and this is how it has performed since Tom Gardner’s first “bet” on the company in the fall of 2017 (that’s ANET in purple, the S&P 500 in orange):

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? ANET has posted earning “beats” most quarters, including a large one last quarter, but it’s often the commentary about how they see they’re customers spending in the future that really drives the stock.

Here’s an excerpt of an analyst note (from Briefing.com) that was posted in early November:

Arista Networks upgraded to Buy from Underperform at BofA Securities; tgt raised to $150
BofA Securities upgrades ANET to Buy from Underperform and raises their tgt to $150 from $105. Analyst Tal Liani said, “We downgraded Arista a few months ago to Underperform on concerns over general spending. Following strong 3Q22 results, solid Cloud Titan spending initiatives, and analysis of the 2023 earnings power, we are upgrading Arista back to a Buy. We believe Street EPS estimates for 2023 of $4.91 are slightly low and expect operating margin to be strong in the near future. We model $5.00 EPS for 2023, and increase our PO to $150 from $105, based on 30x 2023E P/E vs. a 25x target multiple prior. 3Q revenue of $1,176.8mn above Street’s $1,062.0mn, driving a 20c beat to EPS estimates of $1.05. 4Q22 revenue guidance implies solid 44% YoY growth, much higher than prior Street expectations of 31.5%. Contribution of Cloud Titans is strong, and the vertical is now expected to account for approx. 45% of total revenue for FY22, up from ~30% last year.”

The shares are in similar position to where they were at that time, down a few dollars to about $119, and analyst expectations have risen — the average forecast is now for $5.45 in adjusted earnings per share in 2023, which will probably be growth of about 25% (we don’t know what the 2022 fourth quarter number will be), followed by roughly 10% earnings growth in 2024. That means we’re looking at a forward PE of 22, well below the 30X that particular analyst thinks is justified… but with the “cloud titans” now growing to become an even larger part of the business, that does also mean that they’re more at risk. 45% of revenue coming from just a small handful of gigantic customers can lead to meaningful volatility.

We know that Microsoft has been disclosed as a “More than 10% of revenue” customer every year since 2018, and Meta/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.

I’m not aware of any current problems in their business. Cisco (CSCO) has echoed Arista in being quite optimistic — 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 the tech companies on the employee side (Alphabet, Microsoft, Amazon etc. all over-hired during the past couple years, and are fixing that problem with layoffs)… but from what I can tell, there’s no actual sign of that in Arista’s data center order book just yet.

What will happen next quarter? We’re all guessing. 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.

We won’t likely get more meaningful info from the company until they report in mid-February (Cisco generally reports in the ame week), so Arista is likely to move on the same market sentiments that are jolting other tech stocks these days.

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.