Arista Upgraded To Strong Buy On Lower Legal Headwinds

On Jun 16, Arista Networks Inc. (NYSE:ANET) was upgraded to Zacks Rank #1 (Strong Buy). The upgrade can be attributed to reduced headwinds originating from the multiple legal suits filed by Cisco Systems (NASDAQ:CSCO) .

Arista recently announced that the International Trade Commission’s (ITC) Administrative Law Judge (ALJ) has issued an Initial Determination (ID), under which it found that the company’s redesigned switches didn’t violate “the cease and desist order issued by the ITC with respect to U.S. Patent No. 7,162,537 as part of the underlying ITC Investigation No. 337-TA-944.”

ITC had issued the “cease and desist” order in Jun, 2016 after it concluded that Arista infringed on three Cisco patents. On Aug 26, 2016, Cisco brought an ITC enforcement action against Arista asserting that the latter was violating the order in the 944 Investigation.

Notably, ITC’s Final Determination is scheduled to take place no later than Sep 20, 2017. A favorable ruling will allow Arista to resume importation of its redesigned products into the U.S., which will provide impetus to the supply chain as well as improve margins.

Favorable Rulings Drove Share Price

ALJ’s findings follow favorable rulings by the U.S. Customs and Border Protection (CBP) on Nov 18, 2016 and Apr 7, 2017. The company had also won favorable ruling at U.S. Patent and Trademark Office (PTO) to review the validity of a patent it granted to Cisco relating to network device security. This action evened out its way to challenge ITC’s import ban (issued in May), which was slated to go into effect from July, per Reuters.

The favorable rulings have provided significant momentum to Arista shares, which touched a 52-week high of $159.48 on Jun 22. We note that the stock has outperformed the Zacks categorized Communications Components industry on a year-to-date basis. While the stock returned 64.1%, the industry gained 18.3%.

Growth Catalysts

Arista has beaten the Zacks Consensus Estimates in the trailing four quarters, with a positive average of 17.82%. In first-quarter 2017, earnings surged 36% from the year-ago quarter to 93 cents per share. Adjusted revenues grew 38.5% from the year-ago quarter to $335.5 million and easily surpassed the Zacks Consensus Estimate of $326 million.

The company is also is benefiting from the expanding cloud networking market driven by strong demand for scalable infrastructure. The robust product portfolio is helping it win customers on a regular basis.

For second-quarter 2017, management projects revenues in the range of approximately $354–$364 million; gross margin of approximately 61–64% and operating margin of approximately 28%. The guidance reflected continued strong spending trend and growth from new products.

Other Key Picks

Shore Tel (NASDAQ:SHOR) and Broadcom (NASDAQ:AVGO) are other top-ranked stocks in the broader sector that sport the same rank as of Arista. You can seethe complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Shore Tel and Broadcom are pegged at 15% and 13.57%, respectively.

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