Why Arista Networks Stock Is Sinking Today

Arista Networks (NYSE: ANET) stock is heading lower in Wednesday's trading. The networking technologies company's share price was down 7.3% as of 10:30 a.m. ET amid a 0.3% decline for the S&P 500 index and a 0.5% decline for the Nasdaq Composite index.

Arista Networks reported its fourth-quarter results after the market closed yesterday, posting sales and earnings that came in better than Wall Street's estimates. But despite the strong Q4 numbers and solid forward targets, it looks like some investors were expecting the company to post even better guidance.

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Arista stock sinks despite strong Q4 numbers

Arista reported non-GAAP (adjusted) earnings per share of $0.65 on revenue of $1.93 billion in the fourth quarter. The performance came in ahead of the average Wall Street analyst estimates, which had called for adjusted earnings per share of $0.57 on sales of $1.9 billion.

Arista's revenue was up 25.3% year over year in Q4, and adjusted earnings per share were up 25% compared to the prior-year period. The business posted an adjusted gross margin of 64% thanks to a favorable product mix and supply chain efficiencies.

What's next for Arista?

For the first quarter, Arista is guiding for sales to come in between $1.93 billion and $1.97 billion. Management also guided for an adjusted gross margin of 63% and an adjusted operating margin of 44%. Investors may have been disappointed with the guidance that gross margin will see a modest decline on a sequential quarterly basis.

After posting for a 6.6% sequential quarterly sales increase in the fourth quarter, Arista's midpoint target only calls for sequential sales growth of 1% in the current quarter. While there's a fair chance that the company will actually exceed its guidance range, it looks like growth will decelerate in the near term.

The company says it expects approximately $1.5 billion in artificial intelligence (AI) revenue this year, with $750 million in sales for its AI back-end networking clusters. Again, some investors may have been looking for more on that front. But while the stock is seeing a pullback in today's trading, Arista continues to look like a worthwhile long-term investment -- and today's sell-off could actually be a worthwhile buying opportunity.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arista Networks. The Motley Fool has a disclosure policy.