Arista Networks, Inc. (NYSE:ANET) Looks Just Right With A 26% Price Jump

Arista Networks, Inc. (NYSE:ANET) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Arista Networks as a stock to avoid entirely with its 50.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Arista Networks certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Arista Networks

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Arista Networks would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. Pleasingly, EPS has also lifted 228% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that Arista Networks' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Arista Networks' P/E?

Arista Networks' P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Arista Networks maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Arista Networks with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Arista Networks, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.