Date Published: 2017-06-05
Written by Ophir Gottlieb
* This is a snippet from a CML Pro dossier originally published on 6-3-2017.
Arista Networks Inc (NYSE:ANET) is one of our all-time favorite Top Picks in the cloud theme, and is rising to all time highs. Here is the stock chart:
We do believe, as the Top Pick dossier refers to it, that Arista Networks is the Pick-axe to Cloud Gold Rush.
Arista Networks Inc was added to Top Picks on 22-Nov-16 for $94.50. As of today it is trading at $152.26, up 61.1% in six-months.
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Further, on 4-5-107 we penned Arista Networks: The Opportunity is Here. The stock price was $134 at the time of that dossier, so Arista Inc stock is up more than 13% in just the two-months since we published that highlight.
WHY THE CLOUD?
Of all the revolutionary trends that are coming our way that we look to, from artificial intelligence, machine learning, genomics, self-driving cars, the Internet of Things (IoT), streaming video on Demand (SVOD), and the rest - the enterprise cloud realm may be the largest of them all.
The cloud is, generally speaking, just a cluster of computers and hardware sharing resources to power the Internet, apps, video, IoT and anything else that is connected and has data. I always search for the best way to demonstrate the explosion that is coming in data.
I like charts, and I like stats, but it's hard to really convey the astounding growth in data we are about to see. So here's a chart, and then I'll try my best with a specific example:
So that's just mobile and it shows the growth in traffic increasing 1,000% in six years. But here's how that translates into data.
In 2012 the Library of Congress estimated that all printed, audio, and video material came in at 3 to 20 petabytes. That means that one exabyte could hold a hundred thousand times the printed, audio and video material, or 500 to 3000 times all content of the Library of Congress.
By 2021, global traffic alone will generate 49 exabytes... per month.
That means that data that is the size of 14,700,000% of all the printed, audio and video material of all-time will be generated in a month on just mobile devices. Yeah, that's just mobile and every month. And if we take that even further out, to say, 2025, the numbers reach billions of percent a day.
The cloud is going to be a huge deal. Here is a chart of that growth:
The old world where Cisco Systems built a wonderful empire was based on dedicated network systems - a fancy way of saying that Cisco provided all of the hardware and guts to the switches (and routers). But, Cisco has secularly lost market share in switching, today at 53%, versus 70% in 2010. The lost business has gone mainly in the Data Center switching side, where Arista Networks inc and do-it-yourself (DIY) white-label solutions have become more prevalent.
First, the image we always reference of market share trends:
But the trend - that is, moving to white-label solutions, has been under reported by the media. Facebook has created a gigantic cloud and has focused on something called the Open Compute Project. Microsoft and Google have joined the Project. These companies are looking to free themselves from the shackles and expenses of the "old way."
Arista Networks Inc is aware of the change - in fact, it has been a part of the change - even the catalyst to the change. Arista's strategy, which has been to take a more software-centric approach of networking, called SDN, is working. The company's hardware is strong, it has exposure to the cloud platforms and generally appears to be more agile than Cisco.
The Arista Inc story is wonderful, full of opportunity and risk, and we highly encourage a read of the Top Pick dossier: Arista Networks is the Pick-axe to Cloud Gold Rush.
But now, onto a critical update that pushed the stock price to fresh all-time highs on Friday.
Arista Inc and Cisco Systems Inc (NASDAQ:CSCO) have been embroiled in one of the most contentious intellectual property battles technology has ever seen. While Uber and Alphabet Inc's Waymo have gotten the juicy headlines, the guts of the cloud world have had their own heavyweight bout.
We wrote extensively about the risks in our dossier Arista Risk Must Be Examined.
Here's a quick primer before we get to the update:
Cisco has filed a lawsuit claiming that Arista has infringed upon its patents and the accusation is big one. Arista was founded by ex-Cisco employees and the lawsuit claims that essentially all of Arista's success is a patent rip-off. To restate clearly, this is not a small off on the side lawsuit, this is a lawsuit of enormous proportions with respect to the accusations.
In fact, for a moment, the International Trade Commission placed an import ban and cease and desist order covering all Arista (ANET) products. The ITC determined that Arista willfully and intentionally infringed three Cisco patents covering core, Cisco-proprietary network functionality.
For Arista's customers and partners, the cease and desist order blocks the marketing, sale or distribution of all inventory of imported infringing products. It also means that Arista is unable to honor the service and warranty contracts for any infringing products sold after the ITC's ruling date [of] June 23.
For Arista's suppliers, the ITC orders mean that Arista cannot import parts or components to manufacture infringing products in the United States.
Now, all that ended recently when Arista Networks  got a vote of approval from U.S. customs authorities with its newest versions of its products.
But, the risk isn't gone. While some will say Cisco is throwing up a last ditch effort to protect its technology which, as we saw in the chart at the top, is in full blown competitive free fall, others will say this is a legitimate case of intellectual property theft.
It appears that Arista Inc has yet again won the battle of old versus new. Here it is, straight from one of our favorite all-time journalists, Barron's Tiernan Ray:
The Patent board wrote:
"We determine that Petitioner (Arista) has met its burden of showing, by a preponderance of the evidence, that all of the claims for which trial was instituted are unpatentable."
We'll save the technical details and get to the conclusion, which is that, for now, the patent fight is finally over and Arista Inc will not have to turn on its manufacturing plant in the United States, which would have taken a bite out of gross margins.
We do note that it is quite possible that Cisco Systems Inc is not done yet, the company has been relentless in trying to defend itself and has used aggravated language declaring that Arista has blatantly infringed on its copyrighted command-line interface terms, noting direct copy-and-paste scenarios in which the firm neglected to fix Cisco's typos.
Of course, Arista has argued that the commands aren't protected by copyright, suggesting Cisco is simply trying to thwart growth of the upcoming firm. It looks like Arista Inc was right.
We like Arista Inc long-term, but the price is high and we don't believe any extra emphasis should be given to the company just because of this ruling. As always, in this toppy market we do see the potential for a correction, but when we look out 3-7 years, we see Arista Inc continuing to take down Cisco Systems Inc moat and growing rapidly into the cloud.
For you option traders we offer this read:
Options and the Cloud Revolution A classic example demonstrates that four weekly options does not equal one monthly option.
The author has no position in Arista Networks (NYSE:ANET) at the time of this writing.
WHY THIS MATTERS
It's finding the technology gems, like Arista, that can turn into the 'next Google,' or 'next Apple,' where we have to get ahead of the curve. This is what CML Pro does.
Each company in our 'Top Picks' has been selected as a future crown jewel of technology. Market correction or not, recession or not, the growth in these areas is a near certainty.
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Thanks for reading, friends.
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