Motley Fool’s “Our CEO is betting $280,240.56 this stock could 5X”

Sniffing out Tom Gardner's latest teaser pick

By Travis Johnson, Stock Gumshoe, September 18, 2017

The Motley Fool has for most of this year been teasing their Shopify (SHOP) recommendation with headlines that tout the fact that SHOP’s CEO is “betting” $560 million (or now $780 million) on the stock, but today we’ve got a slightly different spiel… this time it’s Tom Gardner, Motley Fool CEO and half of the headline duo behind Motley Fool Stock Advisor, betting the Motley Fool’s money on a stock.

That’s not a shocking new thing, by the way, the Motley Fool has been investing its own balance sheet for years now — and, of course, $280 thousand sounds a lot less dramatic than $780 million. But the basic gist is the same: You should buy the stock, we’re told, because this guy who’s smarter than you owns shares.

Tom Gardner is a smart guy and has an admirable investing track record at the Motley Fool, though not nearly as exciting as his brother Dave (David Gardner has generally been the “growth” guy, credited with some of the Fool picks like Priceline and Amazon that have generated absurd returns over a long period of time; Tom has mostly cultivated the image of being a “value” guy).

Here’s part of the ad letter that caught the attention of Gumshoe readers:

“Our CEO is betting $280,240.56 this stock could 5X

“I wasn’t allowed to tell you yesterday… but I have some major (and timely) news to share.

“See, Motley Fool CEO, Tom Gardner just revealed his latest stock pick… and savvy investors are sprinting to take advantage.

“Because Tom has gone on record saying that this company is ‘tailor-made for Motley Fool investing…'”

The ad came rolling in over the weekend, by the way, so that “yesterday” is a reference to Friday… so presumably this was a recommendation that Tom Gardner made to Stock Advisor subscribers on Friday.

What else do we learn about it? The ad refers to it as a “cloud-networking powerhouse” and gives a few hints about recent performance:

“… this pioneer behind next-generation data centers and cloud networking, knocked the cover off the ball in this most recent quarter.

“Revenue far exceeded management’s guidance, growing 50.8% to a record $405.2 million. (Management was guiding for revenue between $354 million and $364 million.) GAAP net income more than doubled to $102.7 million, and free cash flow rose more than 18% to $74.3 million.”

So what’s the stock? Thinkolator sez this is Arista Networks (ANET), which is indeed a fast-growing cloud networking company. It’s pretty big, too, with a market cap of about $13 billion.

Those clues dropped in the Stock Advisor pitch are an exact match for the company’s last quarter, reported on August 3.

I don’t know a lot about the operating environment for networking system companies, but Gartner favors Arista as second to only Cisco in the space when it comes to “vision” and “ability to execute” in their Magic Quadrant — this is how they sum up Arista:

“Arista Networks, based in Santa Clara, California, is focused exclusively on data center networking and continues to grow above market rates, reaching a 9.8% revenue market share in 2016. Its Extensible Operating System (EOS) software is highly programmable and can be integrated with nearly all third-party cloud management and orchestration infrastructures. Arista’s CloudVision provides a central point of management, facilitating integration with third-party controllers (including VMware NSX). The vendor’s hardware strategy is based on leveraging merchant silicon from multiple suppliers and thus its focus is primarily on software and management, although Arista has shown an ability to deliver optimized merchant silicon-based products. Over the past year, Arista introduced support for data center interconnect (DCI) through the R-Series and announced containerized EOS for disaggregated use cases that use third-party hardware. The vendor also delivered more streaming telemetry capabilities, to improve visibility of network performance. All enterprises should consider Arista, particularly large organizations with advanced requirements that need flexible and programmable solutions. The resale partnership with HPE will help Arista increase global market coverage.”

Stock Gumshoe depends on these kinds of technologies to maintain this lovely website for your edutainment, of course, but I can’t claim to have any inside knowledge or independent understanding about whether or not Arista is particularly strong in “streaming telemetry capabilities” or “orchestration infrastructures,” but the Gartner endorsement is pretty impressive — you can see it here, along with their strengths and cautions about Arista.

To give another perspective, from the usually pretty cautious Morningstar folks: They give it a “fair value” of $136, so it’s well over that and is roughly 30% overvalued, in their analyst’s opinion… probably mostly because they don’t have much of a “moat” in what is likely to continue to be a very competitive market.

Right now, though, they’re doing exceptionally well — part of the reason for that big “beat” last quarter was their lower tax rate, and their margins improved because R&D and other costs did not rise as fast as revenue… but the huge jump in revenue has really been the big driver, which you like to see for a growth stock.

And if you go back a few years and can get over the fact that you’d prefer to have bought it at $90 a year ago, you can at least see that the fundamentals are also growing at a torrid rate — this chart just demonstrates that revenue per share (up about 75% in three years) and earnings per share (up 170%) have been supporting the share price gain of 185%. The trailing PE ratio (that green line at the bottom) hasn’t really changed at all, so investors aren’t just changing their sentiment and deciding to pay a higher multiple for Arista’s earnings — the company has actually been growing.

So ANET is currently at $185 (it did pop at midday on Friday, and again this morning, so that’s another confirmation, though unneeded given the certainty of the match, that the Fool issued its recommendation for the stock — Stock Advisor recommendations go out at Noon on Fridays). At that price, you’d be paying 39X current-year adjusted earnings estimates of $4.71… and 33X next year’s estimated earnings per share. There’s some net cash on the books, roughly a billion dollars, but not enough that you’d change your thinking about the company’s valuation.

That’s a hefty price, but if the company can continue growing revenue at better than 20% a year, as analysts expect, and improving margins to grow earnings perhaps a little faster than that, it’s probably a reasonable price — just know that you’re paying for growth, so at the first hint of a real slowdown in growth the stock can fall very sharply. Not every investor has the stomach to chase growth stocks like this, but the growth is, at least, real — they’re growing very nicely on the top line, their margins are improving as they grow, at least recently, so that’s been creating accelerating earnings growth, which is what investors are most excited about paying for, and they’re in a sector that itself is growing.

That’s worth some thinking, I’d say, even though the sector is also changing rapidly and subject to some real competitive pressures… and even though it’s awfully hard to buy a stock after it has surged this much. I haven’t ever owned this one, but it does at least make sense from a look at the financials and the analyst estimates… but it’s not my money on the line here, it’s yours, so what do you think? Excited about the prospects for Arista? Prefer to wait for a better price? Think they’ll have trouble with the Junipers and Ciscos of the world and investors are overpaying? Or are there some real skeletons we should scare out of the closet? Let us know with a comment below… thanks for reading!


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40 Comments on "Motley Fool’s “Our CEO is betting $280,240.56 this stock could 5X”"

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ROBERT
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0
ROBERT

Its ANET, have a sub to MF, stock advisor. You’re 100% on this one.

chiro85
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chiro85

Me, too. Arista it is.

George
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George

Great research again Travis!! Yes, as a former/longtime ago Motley Fool subscriber, MF picks will normally dip after a recommendation made midday Friday, so I think there’s a better entry point especially with the markets overextended. Thanks for all you do!! And, you hit it with the rapid changes in the field. Respectfully, George

Sam
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Sam

You are right. Today it gapped up. If it doesn’t go up again, it should come down just above $180. Let’s wait for a while.

Fabian
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Fabian

Too old to run after the bus. They came up with SHOP in the low 30’s, I’ll keep that one.

thinairmony
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thinairmony

1 Stock to Buy for the Return of “iPhone Mania”
iPhone madness is back and one little-known company is allowing Apple to radically reshape the future of the iPhone… giving individual investors a rare second chance to get in on the ground floor of the smart phone revolution

thinairmony
Guest
0
thinairmony
1 Stock to Buy for the Return of “iPhone Mania” iPhone madness is back. And one little known company is allowing Apple to radically reshape the future of the iPhone… and giving individual investors a rare second chance to get in on the ground floor of the smart phone revolution. Dear fellow investor: A growing chorus of Wall Street insiders are calling for a once-in-a-decade Apple opportunity. Forbes is calling it an “iPhone tsunami.” And JPMorgan is urging investors to “stock up now before iPhone mania begins in earnest.” The story is all about pent-up demand… industry experts are predicting… Read more »
widmumble
Member
1
widmumble

Wrong Gardner but likely a better growth story. My thinkolator says this one is Universal Display Corp. OLED.

Ticked
Guest
0
Ticked

You just stumbled on to Gumshoe??? Just read but don’t write..

thinairmony
Irregular
-230
The post I posted is Rule Breakers latest teaser. It’s the 10 year anniversary , they have coming out with a limited edition iPhone X (10) limited by ordering . Here is link https://www.fool.com/video-alert/rule-breakers/rb-supercycle/?campaign=rb-supercycle&gclid=CI2Sm7azstYCFZW3wAodhrgGTw&source=erbgglimu0000016&testId=v-supercycle&aid=9041&cellId=0 It will have OLED curved lens, infrared facial recognition camera to log in,, Apple New bionic circuit, rumor has it a outsource company will make the OLED lens. OLED outsources. One bad thing is OLED patent runs out at end of 2017. This is just a small part about the anniversary limited edition iPhone X, Sooner there is a iPhone 8 2 different types at about… Read more »
thinairmony
Irregular
-230

Just before Apple let’s out a item that rocks the tech world everyone bashes them then everyone. B-h I-a N-t G-e O-s on them.

Curt Squires
Irregular
3
Curt Squires

I have personally voted with my $ for one of Arista’s competitors, Extreme Networks.

Karl Svensson
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Karl Svensson

With the growing need for bigger and bigger Data Centres I’ve put a little in data centre REITs.

Karl Svensson
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Karl Svensson

Looks expensive to me…no better value so why do you prefer it? Or did you buy a year ago?

deiss
Member
0
deiss

Louis Basenese
Investment Research Director,
True alpha December 2016

Anyone vouch for this guy? Sounds like another charlatan.

rocket_man
Irregular
4

Like most of these clowns Louis spends far more time hyping their more expensive services than giving you sound invest-able advice.

Thane Walton
Guest
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Thane Walton

I, too, bought SHOP… somewhere in the 50 range. I’m not a fan of mining stock, or long shot biotech. But I am definitely a fan of Motley Fool. So I will likely try a little money on this one. At that price, maybe just 10 shares.

guest
Guest
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guest

Great ‘read’ Travis!
Perhaps I am missing something here, but doesn’t the lead-in say ‘could be 5x’?
While the fundamentals of Arista are certainly good, does Motley CEO anticipate a ~$1,000 stock?

Thanks for all the excellent investigative work you do.

Tonald Drump
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Tonald Drump

My valuation model shows that the stock’s value should be $28.33 but it is currently trading at $181.63 on the share market, meaning that the opportunity to buy ANET at a good price has disappeared! If you like the stock, you may want to keep an eye out for a potential price decline in the future. Since ANET’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future,

John Saputo
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John Saputo

Great article….I taking a risky ride on NVDA too and love it so far.

roert barnwell
Guest
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roert barnwell

i like forecasts before they go up close to 100%. any stumble will be a huge loss

SoMuchMass
Irregular
4
SoMuchMass

I wanted in at 80 but didn’t do it, but just bought it. Thing that pushed me over the edge was the companies great founders and management.

ginridge
Guest
0
ginridge

Have they now got different founders and management than they did at 80?

Normally Dubious
Irregular
32
Normally Dubious

They were recommending ANET two years ago when I was a subscriber. Hope they’ve stopped re-recommending Trip Advisor since then.

kuczynski
Irregular
159
kuczynski

$anet & $shop have been good to me … 136% & 128% gains so far … i’m certain others have done better with these, but i’m not complaining 🙂 $shop is currently my largest investment & $anet is 4th

disclosure: i used to various subscribe to motley fool services, but dropped them a year or two back … been an irregular here for many years and don’t plan on leaving

henry

Semsem
Guest
0
Semsem

Anet has done well. I believe that Motley Fool recommends it also.

Semsem
Guest
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Semsem

SHOP has also done very well and SQ; all Motley recommendations.

backoffice
Irregular
177

The only problem I have with Motley Fool recommendations is most of them are made after the gains have been made. I’ve also been on the losing side of some of their dogs that previously they were gung-ho on.

thinairmony
Irregular
-230

Untrue I follow them and they have many. Watch Tmus. They have called them a buy. Called SHOP a buy early on. Intuitive they called under $30.00, align under $30, NVDA under $30, many have to look at list of NYSE, NASDAQ

thomashogan640
Irregular
9
thomashogan640

You are looking at recent but if you go way way back I lost alot on their picks in the 2000s.

john williams
Guest
0
john williams

what is their latest recommendation that was thwe stock that is better than apple

Investing123
Guest
0
Investing123

Travis
Good afternoon.
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Red Spot- Jupiter A little-known company is about to harness a phase of matter here on Earth…

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In a new type of power plant.

The Nicholas Institute calls it a “black swan technology.” Forbes calls it the “holy grail.”

It has ZERO emissions… and only one liquid byproduct… clean, clear water.

Thank you and Happy hunting… Sounds totally amazing…right ? 🙂

Witek
Guest
0
Witek

Travis! From the Oxford group they are advising on super bond investment, which they say is sure and profits very high. Do you have any idea what they are talking about?

rdennyofin
Member
0
rdennyofin

Motley Fool ads for Rule Breaker Stocks is teasing that a supplier of Apple is a 40X to 100X better investment than Apple… going on to say…. “What most people don’t know is tech insiders think there’s an invaluable, tiny component inside Apple’s newest iPhone that Apple doesn’t manufacture in-house! They don’t make it because they don’t have the technology OR the patents to do so.”

What is the name of this Rule Breaker Stock recommendation (by David)?

thinairmony
Guest
0
thinairmony

The Apple A11 Bionic is a 64-bit ARM-based system on a chip (SoC), designed by Apple Inc.[5] and manufactured by TSMC.[1] It first appeared in the iPhone 8, iPhone 8 Plus, and iPhone X which were introduced on September 12, 2017.[5] It has two high-performance cores which are 25% faster than the Apple A10 and four high-efficiency cores which are up to 70% faster than the energy-efficient cores in the A10.[5][6]

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