Arista Networks, Inc. (ANET)

By both methods, the value today (DCF $150 · Multiples $135) is below the market price ($211).

Today — expensive, no margin of safety: at $211 trades ~56.4% above its value discounted to today (~$135); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$84.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($211) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (27.3%/year) above our base case (18.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$12.4 bn of owner earnings in year 5 (vs ~$8.5 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/NOPAT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = TTM ended 30-Jun-2026 (revenue US$10,540.8 million, operating income US$4,546.9 million), taken from XBRL with the June quarter already ingested. Year 1 is not anchored to the historical trajectory (FY23 +33.8%, FY24 +19.5%, FY25 +28.6%) but to the guidance in the 8-K of 4-Aug-2026 (§5 R1 prior), read with both of its anchors: revenue of approximately US$3,300 million for the third quarter of 2026 —8.7% sequentially over the US$3,035.7 million of the second quarter— and non-GAAP diluted earnings per share of US$1.06 to US$1.08, with a non-GAAP operating margin of 48-49% (equivalent to an accounting operating margin of approximately 44-45%, given that the second quarter reported 45.4% on an accounting basis against 49.9% non-GAAP). Extrapolating the guided quarter with an orderly sequential deceleration, the next twelve-month window grows around 32-35%; 31.0% is taken as the base anchor, just below the mechanical extrapolation and declared as such, because the guidance covers a single quarter and the company itself describes its growth rate as volatile and unpredictable. The path decays geometrically to 10.5% in year 5, a durable rate for a network equipment vendor with a software moat and a growing share of campus and routing revenue. The operating margin starts at 44.0% (consistent with the guidance) and compresses smoothly to 42.0% in year 5: the gross margin is already giving way (62.9% in the second quarter of 2026 against 65.2% a year earlier) on tariffs and the mix shift toward large-scale customers, and operating leverage on expenses offsets it only partly. The year-0 operating cash flow margin (50.3%) is inflated by the growth in deferred revenue —US$1,493.5 million in the first half of 2026 alone, customer funding that is float and not owner earnings— and normalizes toward 41% as growth decelerates. The tax rate (18.95%) is the real TTM effective rate from XBRL (tax of US$945.6 million on pre-tax income of US$4,990.2 million). TTM capex (US$151.3 million) is split half and half between maintenance and growth under the Greenwald criterion: with net fixed assets over sales of 3.0% and sales growing more than US$3,000 million in year 1, approximately half of an already minimal capex buys expansion. The change in working capital is normalized to zero because the swing is deferred revenue float, which the method treats as proprietary funding and not as owner earnings. There is no financial debt and cash and marketable investments total US$13,343 million at 30-Jun-2026; cash accumulates (`accumulateCash`) because the real series shows it growing from US$10,743 million in December 2025 to US$13,343 million in June 2026, with retention of 88% of the flow (buybacks of US$620.1 million against free cash flow of US$5,155.3 million and no dividend). No share path is modeled: the diluted count went from 1,268.5 million (FY23) to 1,276.0 million (TTM), that is with no material net reduction, because the buyback barely neutralizes issuance from stock-based compensation.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $168 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $211, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $168 in 5 years and a required return of 4.5% annually, the maximum to pay today is $135. Against the current market price ($211), the margin of safety is -56.4% (trades above the maximum → a premium is paid) and the total return at that price would be -4.4% annually.

• Entry multiple. The stock trades at 69×, well above the ceiling of the archetype's exit band (15-21x NOPAT).
• Exit multiple. 19x NOPAT, in the upper part of the band, justified by the return on capital and the double-digit terminal growth: the multiple is not punished to force the verdict.
• Forward compression. The entry multiple drops to 25× on the year-5 metric, still above the exit band.
• Estimated return. -4% annually in the base scenario, versus -4% in the adverse case and -4% in the favorable case.
• Terminal earnings yield. A multiple of 19x equals a yield of 5.3%, which presupposes continued growth beyond the horizon: it is consistent with a terminal rate of 10.5% annually.
• Convergence of methods. Discounting cash flows at the risk-free rate with a floor yields a per-share value of the same order as the multiples valuation, both below the price of $211.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. 24.9% on capital employed, in the exceptional band against the 10% bar.
• Capital intensity. Capex of US$151.3 million on revenue of US$10,540.8 million (1.4%), with fully outsourced manufacturing and no owned plant.
• Customer funding. Deferred revenue of US$6,865.9 million that grew US$1,493.5 million in the first half of 2026 alone: working capital is partly funded by customers.
• Cash conversion. TTM free cash flow of US$5,155.3 million against net income of US$4,044.6 million (127%), though part of the excess is customer funding and not owner earnings.
• Stock-based compensation. US$502.3 million in the TTM, 4.8% of revenue and 9.7% of free cash flow: below the method's materiality threshold, and the valuation metric expenses it by starting from GAAP operating income.
• Earnings quality. No material non-recurring adjustments in the TTM; the non-GAAP reconciliation is limited to stock-based compensation, intangible amortization, and results from strategic investments.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Arista does not publish unit, price, or market share indicators; the MD&A describes demand qualitatively. The indicators with a verifiable level in the filing are customer concentration, stock-based compensation, deferred revenue, and the product/services breakdown. The economic driver of growth is ports deployed by volume times price per platform, and both rise when cloud operators migrate to higher-bandwidth network fabrics, but neither is reported separately.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Trajectory. 48.6% (2022), 33.8% (2023), 19.5% (2024), 28.6% (2025), and 37.7% year over year in the second quarter of 2026: high but uneven growth.
• Path anchor. Year 1 is anchored in the guidance from the August 4, 2026 8-K (revenue of approximately US$3,300 million and non-GAAP diluted earnings of US$1.06 to US$1.08 for the third quarter), not in the historical trajectory.
• Geographic composition. Americas 79.1% of 2025 revenue, Europe, Middle East and Africa 11.9%, Asia-Pacific 9.0%; international exposure grew faster than the consolidated figure.
• Product/service mix. Product grew 28.8% and services 27.7% in 2025: the recurring share grows at the same pace as equipment, without gaining relative weight.
• Predictability. The company states that the long-term trajectory of generative and agentic artificial intelligence technologies remains unknown and that customers may have overestimated their demand.
• Reinvestment runway. Declared adjacencies in campus, routing, network security, and in-rack interconnect, with minimal capex required to attack them.

• Recurrence. Services and subscriptions are 15.9% of revenue; the rest is equipment sales tied to the customer's deployment calendar, with uneven order cycles.
• Differentiation. The hardware runs on third-party merchant silicon; the real differentiation is the proprietary operating system and the unified management platform.
• Customer concentration. Two customers accounted for 26% and 16% of 2025 revenue (42% combined), and the company warns variability will remain material.
• Pricing power. Gross margin fell from 65.2% to 62.9% year over year in the second quarter of 2026 on tariffs and mix; pricing power exists but does not fully absorb the external cost.
• Operating leverage. Operating expense grew 17.7% year over year in the second quarter of 2026 against revenue that grew 37.7%, which took the GAAP operating margin from 44.7% to 45.4%.
• Sector capital cycle. Capital is entering forcefully into networking equipment for artificial intelligence —competitor consolidation and cross-investments from graphics processor suppliers— which compresses returns if the moat does not hold.
• Supply chain. Fully outsourced manufacturing (Jabil, Sanmina, Foxconn Hon Hai) in Malaysia, Vietnam, and Mexico, with a predominant switching silicon supplier without a guaranteed supply contract.

• ✓Leverage (net debt / EBITDA)Net cash $13.3 bn
• –Interest coverage (EBIT / interest)no data
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 100% of ROIC
• ✓Value creation (ROIC − 10% bar)+15pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.6x
• –Float / working capitalNeutral WC
• !Dilution (SBC % of revenue + shares)SBC 4.8% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Financial debt. Zero: the balance sheet as of June 30, 2026 records no short- or long-term debt.
• Liquidity. US$2,290.2 million in cash plus US$11,053.1 million in marketable securities, versus US$10,743.0 million six months earlier.
• Working capital. Current assets of US$20,163.4 million against current liabilities of US$6,818.4 million, of which US$5,100.7 million is deferred revenue.
• Inventory. US$2,535.3 million as of June 30, 2026 versus US$2,247.1 million in December 2025, an increase ahead of the semester's revenue growth.
• Purchase commitments. US$6,800 million non-cancelable, of which US$6,300 million with confirmed receipt within twelve months: exposure to an abrupt demand cutoff.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Continuity. Jayshree Ullal leads the company as chief executive officer and chairs the board; Chantelle Breithaupt is chief financial officer.
• Capital allocation. In 2025 capital was directed to buybacks (US$1,603.1 million), acquisitions (US$300.0 million), and capex (US$119.5 million), with no dividend.
• Buyback effectiveness. The diluted count went from 1,268.5 million (2023) to 1,276.0 million (TTM): the buyback offsets stock-based compensation issuance rather than reducing capital.
• Financial prudence. No financial debt and US$13,343 million in liquidity against non-cancelable purchase commitments of US$6,800 million.
• Insider ownership. Directors and executives as a group hold 5.0% of the capital per the 2026 DEF 14A, a meaningful stake for a company of this size.

• It is not cheap: at 69× the price bakes in that current growth holds and that the multiple does not compress, two assumptions the base path does not validate.
• The market is paying for the business's verifiable quality —return on capital of 24.9%, no debt, US$13,343 million in liquidity— and for the central position in artificial intelligence infrastructure deployment, which is real and documented in the 37.7% year-over-year growth of the second quarter of 2026.
• What the price does not discount is concentration: 42% of revenue depends on two buyers that design their own infrastructure, a level risk and not just a rate risk, which the company lists first among its risk factors.
• It also does not discount the multiple compression imposed by the archetype's own math: a networking equipment maker growing in the high single digits by year 5 does not sustain today's entry multiple, however good the business.

There is no discount from forced selling or missing buyers to explain; the Step 9 exercise here is the inverse one, understanding why the market pays this price, and the answer is that it is paying for quality and for the artificial intelligence investment cycle at a multiple that requires both to last longer than the base path assumes.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -18%/year (-64% total): the margin of safety protects the downside. The bull (+1%/year, +5% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Customer concentration. 26% and 16% of 2025 revenue in two customers; they can cancel or modify orders with little or no notice.
• Single silicon supplier. Broadcom is the predominant switching silicon supplier, without a guaranteed supply contract.
• Tariffs and trade. Production in Malaysia, Vietnam, and Mexico with components from China, Taiwan, Thailand, and the Philippines; Sections 301 and 232 measures and retaliation raise costs.
• Alternative architectures. Ethernet competes with InfiniBand and NVLink in the back-end cluster segment and is still outperformed by proprietary technologies within the rack.
• Competitive consolidation. Hewlett Packard Enterprise acquired Juniper, Broadcom acquired VMware, and Nvidia invested in several artificial intelligence cloud providers.
• Demand cyclicality. Growth ranged between 19.5% and 48.6% over four fiscal years; the company itself describes it as volatile and unpredictable.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 25% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 18% at a multiple/growth of 3.9 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 2% (EBIT/EV) + ROIC 25% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 27% vs our 18%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -18%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, network effects → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 27% growth, far above our 18% — heroic assumptions.