Data Center Infrastructure

Arista Needs to Hang Tough as Stock Dives

Arista is taking a beating this week. But if you have to get beat up, there are worse ways.

Arista Networks Inc. stock hit an eight-month low Friday following a couple of analyst downgrades this week, as it continues under the cloud of an ongoing lawsuit from Cisco.

Arista stocked climbed to $65 on January 28, then dipped to $63 this Tuesday, and plummeted down to $56.55 Friday, recovering slightly to $56.70 in after-hours trading.

The tumble was apparently driven, at least in part, by a note from MKM Partners , which reiterated its buy rating for Arista but lowered its estimate and price target. MKM expects higher legal expenses from the patent and copyright infringement lawsuit brought by Cisco Systems Inc. (Nasdaq: CSCO) late last year.

Cisco filed patent and copyright lawsuits in December charging Arista with "repeated and pervasive copying of key inventions in Cisco products." In addition to features, Cisco charged Arista with unlawfully copying Cisco's command line interface and user manuals -- complete with grammatical errors. (See Cisco Slams Arista With Massive Patent & Copyright Suit.)

Arista denies the charges, saying the CLI is industry standard -- though it did admit to the bit about the manuals. Arista claims the lawsuit is a "smear campaign" and that Cisco is using the courts for marketing. (See Arista CEO: Cisco Lawsuit Is 'Smear Campaign' .)

The MKM note isn't all bad. MKM reckons Cisco is unlikely to accept a monetary settlement from Arista. "We see Cisco's suit as a 'Hail Mary' attempt to put a competitor it is highly worried about out of business," MKM says.

MKM sees "a very small risk (approx. 1%) of a catastrophic outcome for Arista." It's unlikely Cisco will win an injunction against Arista, MKM says. And the analysts "think the stock should perform better from here driven by the fundamentals and earnings."

The MKM note comes after Citi downgraded Arista to neutral from buy on Wednesday, "citing a lack of margin upside," The Wall Street Journal reports. Citi also cited a trade-journal report in Taiwan (possibly this one) that said Facebook is considering a shift to white-box networking gear, which would take business from Arista and Cisco.

All of this is bad news. And yet it could be worse.

It's bad news in the short term, but it has the potential to turn good further out.

MKM notes that Arista's fundamentals are sound.

The Facebook threat is nothing new. Facebook has been pursuing commodity hardware for some time, going into production testing of its Wedge switches over the summer. It's part of the Facebook-backed Open Compute Project, comprising networks as well as servers, storage, data center design and more. (See Facebook in Production Testing of Open 'Wedge' Switch.)

If Facebook makes a strategic investment in white boxes, it'll be hard for proprietary networking vendors, including Arista. But Arista is well positioned to ride out the difficulties because of its strong technology and execution.

As for the Cisco lawsuit: Arista announced Friday that it will report earnings February 19, and used the occasion of that announcement to once again scold Cisco. "Arista believes that the complaints lack merit and Cisco's unorthodox methods of publicizing them suggest a deliberate effort by Cisco to use the courts to gain a marketing opportunity," Arista said in a statement on Friday.

Arista cited an International Trade Commission decision to investigate Cisco's complaints, which looks bad for Arista. But the ITC investigates virtually every complaint that's filed, Arista claims.

Find out more about key developments related to the systems and technologies deployed in data centers on Light Reading's Data Center Infrastructure Channel.

Arista has cried foul at Cisco before, and these statements just look foolish.

Is Arista right that Cisco is using the courts for marketing? Of course Cisco is. Businesses do what they can to undermine their competition. Cisco has always been adept at competitive marketing -- it's silly to pretend to be shocked when it happens to you.

Arista needs to stop complaining and do what it can to defend itself in court and ride out the negative publicity by delivering product and service and making sales. Distraction is one of the biggest dangers of a lawsuit like Cisco's -- and that's something Cisco knows very well.

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected]

brooks7 2/9/2015 | 4:30:46 PM
Re: good job Wall Street is only semi-irrational in this case. Arista operates at a PEG of 1.35. Not super high but not low. So any hiccup will impact the foward P/E. Any hint of weakness can affect the price. Remember the price of shares is a look at risk adjusted return and the risk went up. Not by a lot, but up. seven
Mitch Wagner 2/9/2015 | 2:37:37 PM
Re: good job Wall Street is irrational. 

My theory: Investors are freaking out because their kids have been home from school for three days (or however long it's been) on account of the blizzard. The investors heard Barney I Love You You Love Me one time too many and completely went bananas. 

This morning the roads are plowed, the kids are in school, and the investors are saying Arista is going to be fine. 

As for Arista's own statements -- which make Arista look weak -- if I were them I'd limit my public comments on the suit to substantial statements of fact, along with, "Look, John Chambers is an extremely intelligent and savvy businessman and if I were him I would be doing exactly what he was doing." Then pause for a minute to let the listener go WTF -- is Arista actually PRAISING Cisco here? Then continue, "If I were no longer able to compete based on technology, product, and services, I'd do what I could to spread FUD about my competitors." Then smile enigmatically. 

Disclaimer: I'm just saying what I would do if I were CEO of Arista (and Arista can be thankful that I'm not!). In reality, both Arista and Cisco have strong technologies and services and are stiff competitors. 
Steve Saunders 2/9/2015 | 2:25:26 PM
Re: good job Perhaps they read your article? 

No reason, in my personal opinion, for a stock to drop 8 percent in one day when the risk of losing the law suit is less than 1 percent. 
Mitch Wagner 2/9/2015 | 2:15:19 PM
Re: good job Thanks, Steve. ANET is now trading at $59.57, up 5% from Friday close. Perhaps Wall Street agrees on the fundamentals. 
Mitch Wagner 2/9/2015 | 2:13:14 PM
Re: Wah. danielcawrey - It's enormously tricky to navigate from proprietary to open business models. The enterprise IT industry is littered with the bones of once-dominant companies that failed to make that transition. Digital Equipment Corp. is the most prominent example that comes to mind. 
Steve Saunders 2/8/2015 | 10:54:20 AM
good job Very nice, balanced article, Mitch. The combination of arista switch and VMware hardware is becoming a standard solution in many customers, I am told, so the customers are speaking. I agree with your distraction comment but knowing Jayshree I doubt their is any risk of her losing track of the customer demand!
Joe Stanganelli 2/8/2015 | 2:51:53 AM
Re: Wah. @daniel: I had the same question...  Facebook has been developing their own hardware for years -- but for themselves.  Absent some further evidence, I'm less than convinced that they're going to become a hardware company now too.
danielcawrey 2/7/2015 | 5:02:37 PM
Re: Wah. I get why Facebook is developing their own network hardware, but is that really a threat to incumbent companies? Why don't they get into the white box game themselves? I get that these networking hardware companies want to keep margins up, but they really need to figure out the services side anyways, so it would seem logical to go with the idea of whitelabel. 
Joe Stanganelli 2/7/2015 | 1:03:04 AM
Wah. Arista strikes me as being full of a bunch of hypocritical crybabies.  They lambaste Cisco and everybody else under the sun who sues them when Arista has plenty of experience being on the other side of the patent infringement courtroom itself.

And then there was that whole "friends and family" stock offering debacle.  To me, their CEO and their corporate communications team lack credibility these days.
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