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.
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.