Arista Hit Hard On Q4 Sales Warning: Is Facebook To Blame?

Arista Networks Inc ANET shares were plunging to a two-year low after the maker of data center switches issued a downbeat fourth-quarter outlook Thursday. 

The Analysts

MKM Partners analyst Michael Genovese maintained a Neutral rating on Arista and lowered the fair value estimate from $275 to $210.

Wells Fargo Securities analyst Aaron Rakers maintained a Market Perform rating and lowered the price target from $270 to $205.  

Citigroup analyst Jim Suva maintained a Buy rating and reduced the price target from $315 to $225.  

KeyBanc Capital Markets analyst Alex Kurtz downgraded Arista from Overweight to Sector Weight. 

MKM: Facebook's Delayed Server Refresh Behind Arista's Woes

Arista's third-quarter results were solid, but the "scary" Halloween guidance was due to Facebook, Inc. FB, Genovese said in a Friday note. 

The company did not name the specific Cloud Titan customer that is responsible for the fourth-quarter softness, the analyst said. 

Arista noted a sudden slowdown in orders from Facebook at the end of the third quarter, along with large fourth quarter and 2020 forecast reductions, he said. 

This, according to the company, is due to Facebook delaying its server refresh by a year, the analyst said.

The lower fourth-quarter sales guidance isn't likely due to Facebook's decision to switch to just-in-time procurement, Genovese said. 

Despite the revenue estimates and the stock being aggressively reset, MKM is staying on the sidelines, Cloud outlook is significantly worse and there are meaningful deferred revenue headwinds in 2020, the analyst said. 

See Also: Cloud Competitors: How Amazon Web Services, Microsoft Azure's Quarterly Performance Stacks Up

Wells Fargo: An Evaporated Momentum Story

Along with the one-year pushout in server refresh at a major cloud titan customer, the 400G cycle is also being pushed out by 12 months due to a slipping optics ramp, Rakers said in a Thursday note.

The company's guidance for flat-to-down year-over-year growth at its Cloud Titan customers in 2020 raises doubts regarding growth at the reminder of its customers, the analyst said. 

Wells Fargo significantly reduced its estimates for Arista and views the company as an evaporated momentum story.

Citi: Investors Will Likely Take Wait-And-See Approach

The initial sharp downward move for the stock is warranted, given expectations for a 20-30% drop in sales and EPS, Suva said in a Friday note. 

"Investors will likely take a wait and see approach for a few quarters as the year 2019 has now erased the stock gains and low visibility provides minimal confidence for a near term recovery," the analyst said. 

Citi's financial model for Arista has moved materially lower, resulting in a significant cut to the price target.

KeyBanc: Reduced Visibility On Top Accounts Limits Conviction

Arista's visibility within the Cloud Titan vertical appears challenged for a period of time extending well beyond the fourth quarter, Kurtz said in a Thursday note. 

The analyst continues to see Arista as well-positioned competitively in the cloud vertical.

Yet tthe lack of near-term visibility with top accounts that started in early 2019 continues to limit the conviction in quarterly execution, he said. 

KeyBanc now estimates Cloud Titan revenues be down $20 million in 2019 from FY18 and down another $175 million in fiscal year 2020.

Olivetree: This Could Take a While to Resolve

Arista's pullback could hurt networking stocks such as Cisco Systems, Inc. CSCO, Juniper Networks, Inc. JNPR and Ciena Corporation CIEN, component companies and server stocks, said Olivetree strategist Dan Forman.

Investors could consider rotating into hybrid themes stock and/or storage, he said. 

With the company not guiding for fiscal year 2020, save for a commentary about tough comps, Forman said. 

"This could take a while." 

Price Action

Arista shares were tumblingto their lowest level since November 2017 and were down 23.34% at $187.52 at the time of publication.