We think that Arista Networks Inc. (NYSE:ANET) currently is a better pick compared to NetApp Inc. (NASDAQ:NTAP). ANET stock trades at just over 15x trailing revenues, much more than NetApp’s 3.4x multiple. Does this gap in the companies’ valuations make sense? We believe it does, and we only expect it to increase further. While both companies have seen a steady rise in revenues since the lockdowns started being lifted, NetApp’s revenues have struggled over the past five fiscal years, while Arista Networks has seen more consistent sales growth. Arista’s revenues have grown consistently YoY from $1.1 billion in FY ’16 to $2.3 billion in FY ’20, with LTM revenues currently standing at $2.6 billion. In comparison, NetApp’s revenue growth has been inconsistent, with revenues first rising from $5.5 billion in FY ’17 to $6.1 billion in FY ’19, then pulling back to $5.4 billion in FY ’20 and $5.7 billion in FY ’21 (NetApp’s fiscal year ends in April). Additionally, Arista’s LTM operating margins currently stand at 30.8%, higher than NetApp’s 19.4%.
Having said that, there is more to the comparison, which makes Arista Networks a better bet than NetApp, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard NetApp vs Arista Networks: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Arista Networks Is The Clear Winner On Revenue Growth
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Arista Networks has seen a compounded revenue growth of 12.1% over the last three fiscal years, compared to a -1% compounded growth in NetApp’s revenues over the same period. Even for the most recent quarter (Q2 ’22 for NetApp and Q3 ’21 for Arista), Arista’s revenues grew 30.8%, in comparison to NetApp’s growth of 11.9%.
NetApp is a larger company whose revenues on an LTM basis stand at $5.9 billion, more than 2x that of Arista’s, which stand at $2.6 billion.
2. EBIT margins: Arista Has Seen Stronger Growth
Arista’s operating margins stand at 30.8% on an LTM basis, higher than NetApp’s 19.4%. Arista’s EBIT margins rose from 12.7% in FY ’18 to 30.2% in FY ’20, and currently stand at 30.8%. On a comparable calendar year basis, NetApp’s margins dropped from 19.9% in FY ’19 to 17.9% in FY ’21, and currently stand at 19.4%. The higher profitability and the faster growth in margins, makes Arista the clear winner on margins.
3. Arista Networks Is Also In A Better Net Cash Position
NetApp’s debt-to-equity ratio currently stands at 13%, compared to Arista’s current debt-to-equity ratio that stands at 0%. Additionally, NetApp’s cash as a % of assets, stands at 49.7%, lower than Arista’s 63%. Clearly, Arista Networks has a much better cash cushion compared to NetApp.
The Net of It All
NetApp’s revenues are larger than that of Arista Networks, but the latter has a higher EBIT margin and faster profitability growth, along with higher historical revenue growth. Despite Arista’s P/S ratio of 15x, compared to NetApp’s 3x, we believe that this gap is set to widen. Additionally, Arista’s P/EBIT ratio currently stands higher at almost 50x, compared to NetApp’s 18x. Given that Arista has seen stronger revenue and margin growth lately and has a much better cash cushion, we believe this is justified and this gap is set to widen. As such, we believe that Arista Networks stock is currently a better bet compared to NetApp stock.
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|S&P 500 Return||-3%||21%||103%|
|Trefis MS Portfolio Return||-1%||43%||290%|
 Month-to-date and year-to-date as of 12/3/2021
 Cumulative total returns since 2017