5 Reasons Why Arista Is Now Piper Jaffray's No. 2 Networking Pick

Some of the litigation, expectation and valuation fears that kept Piper Jaffray on the sidelines with Arista Networks Inc ANET have subsided, prompting the firm to turn bullish on the stock. 

The Analyst

Analyst James Fish upgraded Arista from Neutral to Overweight and increased the price target from $268 to $315.

The Thesis

Arista is likely to turn in a positive second-quarter earnings report Aug. 2, Fish said in a Monday note. (See the analyst's track record here.) 

Demand trends remain strong, Fish said, citing Q2 channel checks. The analyst forecast revenue of at least $519 million, ahead of the $510 million consensus estimate for the quarter. 

"We believe investor expectations are not as high as past quarters, presenting a potential near-term catalyst on Aug. 2," he said. 

Industry data suggests a shift in spending and market share, Fish said.

Citing recent survey results from Cisco Systems, Inc. CSCO, the analyst said datacenter switching losses will continue to Arista. Concerns around whitebox switching, which represents less than 3 percent of the market, are overblown, the analyst said. 

"We believe Arista has the potential to become 'software-only' in time with cEOS."

Major verticals for Arista should grow capex by 30 and 7 percent, respectively, i 2018 and 2019 as customers upgrade to 100G and 200G, according to Piper Jaffray. 

Fish expressed optimism regarding Arista's campus product announcements in May, as its Q2 survey suggested 10 percent of deals include a newly launched campus product.

Recent legal proceedings are favorable for Arista, the analyst said. 

Lowered sentiment, expectations and valuation work in favor of the networking company, Fish said. 

"We are moving ANET to our No. 2 pick in networking for now."

The Price Action

Arista shares have gained 11.4 percent year-to-date.

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