The market has hit year-to-date lows. Interest rate spikes and fears of a global recession have put investors on edge and into "risk-off" mode; but now is a great time for intrepid investors to be bargain-hunting.

Conversely, there are many stocks in the growth/tech sector that have performed relatively well this year that should be considered for a rotation out of the portfolio on account of rising relative valuations. Arista Networks (NYSE:ANET) sits in this bucket. This networking hardware company, one of the main rivals to legacy incumbent Cisco (CSCO), has held up much better relative to tech peers this year. Down only roughly 20% year to date, Arista has enjoyed relatively strong fundamental performance during a time that many companies have reported slowing enterprise spend trends.

I'd advise caution on Arista, however. While I agree that the company retains a best-in-class product portfolio that continues to grow rapidly and take share from Cisco every quarter, and that Arista's 60%+ pro forma gross margins mark the company as a rarity among hardware vendors, there are a number of downside factors that investors should consider.

The first is valuation. At current share prices near $110, Arista already trades at a 24.0x forward P/E ratio relative to Wall Street's FY23 EPS consensus of $4.59 (which, by the way, represents 14% y/y earnings growth. That's not bad, but that strength is already factored into a mid-20s P/E multiple). Right now, many stocks are trading incredibly cheaply - I'd advise investors to look carefully at the small/mid-cap software sector for many high-quality names that are trading at multi-year lows and historic low valuations. Some names I particularly like right now include Okta (OKTA), Palantir (PLTR), and Coupa (COUP).

The second is - how much of Arista's current growth momentum is sustainable? Yes, Arista saw impressive 49% y/y revenue growth in Q2 (which we'll discuss in more detail in the next section), both beating Wall Street's expectations by a wide mile and accelerating sharply over Q1. But with hardware, business is lumpy. Especially because Arista relies on a core set of high-spending "cloud titan" customers, one quarter of strong revenue may mean the order book may be thinner in future quarters. We note as well that Arista completed a number of tuck-in acquisitions in Q2 without disclosing organic growth, so there's some amount of inorganic lift being factored in.

All in all, I don't doubt that Arista remains a solid company with a share-gaining product, rich margins, and expanding earnings - but with the stock market at YTD lows, there are just far better bargains to be had than Arista.

Keep adopting a "watch and wait" stance here. I'd buy Arista in a heartbeat if its P/E multiple sank to 18x FY23 EPS, implying a price target of $83 (25% downside from current levels). Until Arista starts sinking downward again, stay on the sidelines.

Q2 download

Let's now go through Arista's latest Q2 results in greater detail. The Q2 earnings summary is shown below:

Arista's revenue in the second quarter grew 49% y/y to $1.05 billion. This was the first time that the company crossed the $1 billion revenue mark in a single quarter, and it beat Wall Street's expectations of $980.0 million (+39% y/y) by a significant ten-point margin. Revenue growth also accelerated from 39% y/y growth in Q1.

The company noted that strong purchases from cloud titans remained the key driver in Q2 results. Anshul Sadana, the company's COO, gave the following commentary during the Q2 earnings call on the company's deepening relationships with its two main customers, Microsoft (MSFT) and Meta (META), who are each expected to contribute more than 10% to this year's revenue:

As we disclosed in previous calls, Microsoft and Meta are very special customers and expected to each be over 10% of our revenue for the full year. At Microsoft, we are deployed in all layers of their network, from the leaf switches at the top of rack to data center spine and regional spine to WAN and cloud edge layers across the globe. We have partnered together to create the DCI layer with encryption and long-reach pluggable optics, which has now become a gold standard in the industry. Microsoft deploys our products, both with SONiC and EOS, and the engineering partnership to codevelop the next-gen network is stronger than ever. Our newer 400-gig products are deployed in production, and we continue to receive very positive feedback about our quality and execution and continue to be the preferred supplier for Azure.

We have also had a strong partnership with Meta and have been involved with their network design since the early days. We have codeveloped multiple generations of products with them, including the latest 25.6-terabit 7388 platform with unmatched power efficiency and time-to-market advantages. We have deployed in their colorful cluster fabrics with parallel planes. We’ve also deployed in several use cases, including Meta’s backbone layers, where there is a constant need for higher-speed networks."

As previously mentioned, however, stronger than expected cloud titan orders this quarter may mean a slowdown in the order book in future quarters. In addition, though the company noted that the "supply environment remains challenging", another portion of the company's revenue growth could be due to backlog collapsing from the prior quarter.

On the margin front, Arista's pro forma gross margins declined 330bps to 61.9%, down from 65.2% in the year-ago Q2. This was driven both by increased component costs as well as a higher mix of revenue to cloud titans.

However, the company was able to tightly manage opex, allowing for a 57% y/y gain in pro forma operating income to $425.5 million, representing a 40.4% pro forma operating margin - 200bps richer than the year-ago Q2.

Key takeaways

In my view, Arista's strengths are already priced into its stock at $110. Steer clear here unless earnings estimates come meaningfully up, or the stock continues to slide.

Analysts have provided the following ratings for Arista Networks (NYSE:ANET) within the last quarter:

These 16 analysts have an average price target of $143.25 versus the current price of Arista Networks at $108.42, implying upside.

Below is a summary of how these 16 analysts rated Arista Networks over the past 3 months. The greater the number of bullish ratings, the more positive analysts are on the stock and the greater the number of bearish ratings, the more negative analysts are on the stock

This average price target has increased by 1.76% over the past month.

Benzinga tracks 150 analyst firms and reports on their stock expectations. Analysts typically arrive at their conclusions by predicting how much money a company will make in the future, usually the upcoming five years, and how risky or predictable that company's revenue streams are.

Analysts attend company conference calls and meetings, research company financial statements, and communicate with insiders to publish their ratings on stocks. Analysts typically rate each stock once per quarter or whenever the company has a major update.

Some analysts publish their predictions for metrics such as growth estimates, earnings, and revenue to provide additional guidance with their ratings. When using analyst ratings, it is important to keep in mind that stock and sector analysts are also human and are only offering their opinions to investors.

This article was generated by Benzinga's automated content engine and reviewed by an editor.

In the latest trading session, Arista Networks (ANET) closed at $103.91, marking a +0.25% move from the previous day. The stock lagged the S&P 500's daily gain of 2.6%.

Heading into today, shares of the cloud networking company had lost 15.22% over the past month, outpacing the Computer and Technology sector's loss of 15.89% and lagging the S&P 500's loss of 12.9% in that time.

Wall Street will be looking for positivity from Arista Networks as it approaches its next earnings report date. This is expected to be October 31, 2022. On that day, Arista Networks is projected to report earnings of $1.05 per share, which would represent year-over-year growth of 41.89%. Meanwhile, the Zacks Consensus Estimate for revenue is projecting net sales of $1.06 billion, up 41.51% from the year-ago period.

Looking at the full year, our Zacks Consensus Estimates suggest analysts are expecting earnings of $4.04 per share and revenue of $4.09 billion. These totals would mark changes of +40.77% and +38.64%, respectively, from last year.

Any exact changes to analyst estimates for Arista Networks should also be noted by investors. These revisions typically reflect the latest short-term business trends, which can change frequently. With this in mind, we can consider positive estimate revisions a sign of optimism about the company's business outlook.

Our research shows that these estimate changes are directly correlated with near-term stock prices. To benefit from this, we have developed the Zacks Rank, a proprietary model which takes these estimate changes into account and provides an actionable rating system.

The Zacks Rank system, which ranges from #1 (Strong Buy) to #5 (Strong Sell), has an impressive outside-audited track record of outperformance, with #1 stocks generating an average annual return of +25% since 1988. Over the past month, the Zacks Consensus EPS estimate remained stagnant. Arista Networks is holding a Zacks Rank of #1 (Strong Buy) right now.

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Digging into valuation, Arista Networks currently has a Forward P/E ratio of 25.68. For comparison, its industry has an average Forward P/E of 16.65, which means Arista Networks is trading at a premium to the group.

Investors should also note that ANET has a PEG ratio of 1.63 right now. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. The Communication - Components was holding an average PEG ratio of 1.63 at yesterday's closing price.

The Communication - Components industry is part of the Computer and Technology sector. This group has a Zacks Industry Rank of 34, putting it in the top 14% of all 250+ industries.

The Zacks Industry Rank gauges the strength of our individual industry groups by measuring the average Zacks Rank of the individual stocks within the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.

Be sure to follow all of these stock-moving metrics, and many more, on Zacks.com.

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Alicia Keys has accomplished a lot since she got into the entertainment industry. She is an award-winning artist with 15 Grammys, a critically acclaimed actor, a classically trained pianist, and a producer. She is also the loving mother of two beautiful children and wife to producer Swizz Beatz.

© Provided by Showbiz CheatSheet Alicia Keys | Marcus Ingram/Getty Images for ABA

Keys is, without a doubt, a talented and powerful woman who uses her reach for good. Keys founded her nonprofit, She Is the Music, after facing a bleak statistic about women in the industry.

Alicia Keys started a nonprofit due to bleak statistics about women in entertainment

Keys signed to Arista Records in 1998, releasing her debut album, Songs in A Minor, in 2001. The album was a success and earned her 5 Grammys. Since then, Keys has released seven more studio albums and has won several accolades throughout her impressive career.

Keys has been fortunate throughout her career to be in the right rooms and with the right people. However, as she found out, not everyone gets the chance to do so and shine. The singer got to work researching how best she could help women in entertainment, and the result of her research was devastating.

When being honored with a Songwriter Icon award in 2018, Keys revealed that the statistics were “brutal,” citing numbers from a study done by the University of Southern California Annenberg.

“Of almost 3000 pop songwriters credited last year, only 12% were female, only 3% of the engineers were female, and one of them is Ann [Keys’ engineer],” she said. “Only 2% of producers are female, and one of them is me. Our world is 50-50 and it’s time for our industry to reflect that,” the No One singer continued, per Variety.

According to PEOPLE, Keys teamed up with the head of WME East Coast Music Division, Sam Kirby, Ann Mincieli, her engineer and Founder of Jungle City Studios, and Universal Music Publishing Group Chairman and CEO Jody Gerson to create a nonprofit music industry group for female advancement in the entertainment industry called She Is the Music.

“We want to create a model for change that affects women across all industries- time is up on double standards- pay inequity and colleagues who are at best disrespectful and at worst unsafe,” Keys said.

She Is the Music responded to the pandemic in a helpful way

She Is the Music was launched in 2019 and aims to increase the number of women in music, from artists and producers to engineers and songwriters. According to the organization’s official website, the nonprofit offers resources for women-focused initiatives seeking to create change in the industry.

She Is the Music responded swiftly to the coronavirus (COVID-19) pandemic by donating money and resources to MusiCares and also to an ICU doctor at UCLA who was funding the ICU staff’s meals out of pocket during the pandemic.

Since public meetings were discouraged, Keys’ organization also continued its efforts by holding “virtual meetings, writing sessions, and mixers” to keep the momentum.

She Is the Music is ‘paying it forward’

Keys also told the publication that her nonprofit launched three pillars that help them make progress. The pillars, also known as programs offered by She Is the Music, include a mentorship program, an all-women songwriting series, and an industry database of female creators.

According to Keys, She Is the Music is dedicated to “paying it forward” by helping women in the music space. The organization continues to offer resources for the next generation of women in the industry. The nonprofit’s database serves as an inclusive directory that allows aspiring artists to submit their applications and get vetted and verified. The organization also provides scholarships for female music students.

RELATED: Inside Alicia Keys and Swizz Beatz’s Art Collection That Places a ‘Beautiful Black Face’ in Every Room of Their Home

Arista Networks (ANET) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Over the past month, shares of this cloud networking company have returned -12.2%, compared to the Zacks S&P 500 composite's -11.1% change. During this period, the Zacks Communication - Components industry, which Arista Networks falls in, has lost 12.8%. The key question now is: What could be the stock's future direction?

Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.

Earnings Estimate Revisions

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

Arista Networks is expected to post earnings of $1.05 per share for the current quarter, representing a year-over-year change of +41.9%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

The consensus earnings estimate of $4.04 for the current fiscal year indicates a year-over-year change of +40.8%. This estimate has remained unchanged over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $4.55 indicates a change of +12.7% from what Arista Networks is expected to report a year ago. Over the past month, the estimate has remained unchanged.

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With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the exact change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Arista Networks.

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Revenue Growth Forecast

Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.

For Arista Networks, the consensus sales estimate for the current quarter of $1.06 billion indicates a year-over-year change of +41.5%. For the current and next fiscal years, $4.09 billion and $4.63 billion estimates indicate +38.6% and +13.3% changes, respectively.

Last Reported Results and Surprise History

Arista Networks reported revenues of $1.05 billion in the last reported quarter, representing a year-over-year change of +48.7%. EPS of $1.08 for the same period compares with $0.68 a year ago.

Compared to the Zacks Consensus Estimate of $976.35 million, the reported revenues represent a surprise of +7.74%. The EPS surprise was +17.39%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Arista Networks is graded C on this front, indicating that it is trading at par with its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Bottom Line

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Arista Networks. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.

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