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SUMMARY
Parkev Tatevosian, CFA, compares Vertiv Holdings and Arista Networks, focusing on revenue growth, profitability, and valuation. He concludes that while both companies have strengths, Arista Networks offers a more attractive valuation at current prices.
MAIN POINTS
- The comparison begins with an analysis of three-year compounded annual revenue growth rates for Vertiv and Arista Networks.
- Operating profit margins are examined, revealing significant improvements for both companies, with Arista Networks maintaining a higher margin.
- Valuation metrics such as forward price to operating cash flow and forward price to earnings are discussed, showing Vertiv as more expensive than Arista Networks.
- A proprietary discounted cash flow model is used to assess intrinsic values, finding both stocks overvalued relative to these calculations.
- Despite both stocks being overvalued, Arista Networks is identified as the preferred pick due to its relatively better valuation.
- Fiscal.ai is recommended as a financial analysis tool, with a discount offered through an affiliate link.
DETAILED ANALYSIS
A comparative analysis of Vertiv Holdings and Arista Networks highlights key differences in their recent financial performance and market valuations. Over the past three years, Arista Networks has achieved a superior compounded annual revenue growth rate compared to Vertiv. However, Vertiv has shown a notable acceleration in its revenue growth trajectory, while Arista Networks' growth has decelerated.
When examining operating profit margins, Arista Networks stands out with a margin of 42.8% in the most recent trailing twelve months, a substantial increase from 12.7% in 2016. Vertiv has also improved its profitability, raising its margin from 4.6% to 17.9%, with most gains occurring since late 2020.
Valuation metrics reveal that Vertiv is trading at a premium relative to Arista Networks. Specifically, Vertiv's forward price to operating cash flow is 61, nearly 50% higher than Arista's 38, and its forward price to earnings is 55 compared to Arista's 39. Historically, Arista Networks commanded a higher valuation, but Vertiv's recent financial improvements and its strong performance in the data center sector have shifted investor sentiment, leading to higher relative pricing for Vertiv.
Using a proprietary discounted cash flow model, both stocks appear overvalued at current market prices. Arista Networks trades at $142 per share, above its intrinsic value estimate of $103, while Vertiv trades at $371, significantly higher than its intrinsic value of $111. Both companies are trading closer to their 52-week highs, with Vertiv nearly quadrupling in value from its 52-week low.
Despite these valuations, Arista Networks is favored as the better investment choice due to its more reasonable pricing relative to intrinsic value. The analysis also references Fiscal.ai as a valuable resource for financial data aggregation, offering viewers a discount through an affiliate link.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special Motley Fool Stock Advisor offer.
- Parkev Tatevosian's book on stock evaluation.
- Fiscal.ai financial data platform with a 15% discount via affiliate link.
- Webull investing platform sign-up with bonus shares.
- Subscribe to Parkev Tatevosian's Substack newsletter.