JPMorgan Starts Arista Networks At Neutral Amid Pending Lawsuits

Arista Networks Inc ANET has exhibited strong execution and has market opportunities, JPMorgan’s Rod Hall said in a report. The analyst initiate coverage of Arista Networks with a Neutral rating and a price target of $67, citing risk arising from the upcoming August ITC ruling.

Routing Opportunity

Arista Networks has continued to execute well and the new Routing opportunity is a positive, analyst Rod Hall noted. He mentioned that with the March launch of the 7500R lineup, the company had formally entered the $3.4bn enterprise routing market. Even if Arista Networks is able to capture merely 0.11 percent share in this market in 2017, it would add $15m in routing revenue.

Risk From Pending Lawsuit

“Although we believe a case can be made for a slightly higher multiple based on a comprehensive review of tech comps we see material risk to margins and revenues heading into a key August ITC ruling,” Hall wrote.

During the 1Q earnings call, management indicated that they plan to set up US manufacturing. This suggests that management expects the August ruling to go against them, the analyst said.

Although Arista Networks indicated it could achieve the 60-65 percent gross margin target range with US manufacturing, it may be too early to determine this in view of the “logistical complexity” of moving around 80 percent of the company’s sales onshore.

Hall added that it was “difficult to be more constructive until legal and manufacturing risks are better understood.”