Buy Microsoft shares? Stop. Try MSFT provider Arista Networks instead

Microsoft shares (NASDAQ: MSFT) grew more than 100% since the start of 2018, driven by the rapid growth of the company’s cloud business. However, the share price of Arista Networks (NYSE: ANET), a provider of network equipment for cloud data centers that counts Microsoft as its biggest customer, saw its inventory drop about 10% over the same period. This comes despite the fact that Arista’s revenue growth for 2017-2019 was 46%, compared to just 30% for Microsoft. Arista’s reported net margins have also been slightly higher than Microsoft’s over the past 2 years. Does that make sense? We don’t think that’s the case and think Arista is probably a good investment at the moment compared to Microsoft. Our Dashboard Arista Networks vs. Microsoft: Does the Stock Price Move Make Sense? has the underlying numbers.

How do the core businesses of Arista and Microsoft compare?

Let’s take a closer look at the basic business outlook of the two companies. Arista Networks is a company that sells network hardware such as data center-focused routers and switches. The company also caters to the high-performance computing and high-frequency trading space. The company has recently experienced headwinds as some large customers cut back on orders, leading to a drop in quarterly sales over the past two quarters, putting pressure on its inventory.

Microsoft, on the other hand, is a software giant that has successfully transitioned into the cloud computing space. The main driver of Microsoft’s growth and soaring valuation has been its cloud infrastructure service Azure, which saw 59% year-over-year revenue growth in the last quarter. . As demand for cloud-based services from Azure and Microsoft increases, this could increase demand for Arista’s products, as Microsoft was Arista’s largest customer last year, accounting for approximately 23% of revenue in 2019. That could make Arista a good play on Microsoft’s growth. cloud business.

Of course, Arista probably has less pricing power given the competition in the networking market, and Microsoft could reduce its exposure to Arista hardware. However, Arista’s valuation remains attractive, as the company is trading at around 19x based on its current market price and FY’19 EPS, compared to 36x for Microsoft, which should provide reasonable reassurance to investors. Additionally, the longer-term outlook for Arista remains strong. The digitalization of the economy is expected to accelerate with the coronavirus pandemic. This, in turn, could drive demand for cloud computing power, helping networking players like Arista as its customers scale up capacity. Over the next few quarters, the company will roll out its 400G network technology, which is expected to quadruple data capacity, which may also lead to upgrades of older equipment. Arista’s financial position is also stable, as the company has no debt while holding $2.6 billion in cash and cash equivalents, meaning it faces no significant risk during the pandemic. .

Is NVidia a better way to take advantage of the internet infrastructure boom than Arista Networks? See our United States Listed Internet Infrastructure Stock Theme for more details on the financial performance and returns of the stock offering.

See everything Trefis Price Estimates and To download Trefis data here

What’s behind Trefis? Learn how it fuels new collaboration and assumptions CFOs and finance teams | Product, R&D and Marketing teams