Business Strategy and Outlook
Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and it is alleged customers will remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises.
It is seen EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which is held, allows the company to focus on its core competencies.
Arista works closely with its core customers to optimize their networking ecosystems, which it is alleged, can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, It is viewed, that Arista is growing alongside key customers and that new ventures have expanded from core competencies. It is held that Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.
Financial Strength
It is considered Arista to be in a financially healthy position; its zero-debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. It is held that the company’s financial health will remain stable and that cash could be deployed for growth via bolt-on products or technologies.
Bulls Say’s
- Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades.
- Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines.
- Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.
Company Profile
Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific. (Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Advanced Micro Devices designs an array of chips for various computing applications. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. Morningstar analysts think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives analyst confidence that the firm will generate excess returns over the cost of capital over the next decade and thus warrants a narrow economic moat rating.
Morningstar analysts thinks the firm is well positioned to enjoy data center growth driven by the shift from on-premise to cloud computing. In the mature PC market, Morningstar analysts think AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in both PCs and servers, though analysts expect x86-based chips to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semicustom processor applications, such as game consoles. AMD’s semicustom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though Morningstar analysts don’t believe AMD is as competitive in GPUs as it is in CPUs.
AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader
In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. Consequently, Morningstar analyst are raising its fair value estimate for AMD to $130 per share from $128. The updated fair value reflects the combined entity .Management expects annualized cost synergies of $300 million within 18 months, based on synergies in cost of goods sold and shared infrastructure through streamlining common areas. Morningstar analysts assume the joint firm will enjoy better cost economics at TSMC, with both standalone AMD and Xilinx being prominent customers of the foundry leader.
Financial Strength
At the end of June 2021, the firm reported $2.6 billion in cash and cash equivalents against $313 million in long-term debt. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While the firm has generated solid cash flow in recent years, the company’s longer-term competitiveness remains heavily dependent on the ability of AMD to retain healthy market share across PC, server, and GPU segments.
Bulls Say
- AMD’s recent CPU and GPU offerings have been more competitive with Intel and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies.
- AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
- AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.
Company Profile
Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook:
Mastercard has multiple characteristics that draw investors’ attention. Despite the evolution in the payment space, a wide moat surrounds the business and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable. Mastercard benefits from the on-going shift toward electronic payments, which provides plenty of opportunities to utilize its wide moat to create value over the long term. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting that this trend still has a lot of room to run, and the emerging markets could offer a further leg of growth even if growth in developed markets slows.
Mastercard is moderately skeptic to more modest movements in the electronic payment space, as it earns fees regardless of whether payment is credit, debit, or mobile. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. Full recovery is forecasted, and this should drive relatively strong growth in the near term. From a longer-term point of view, it is likely that smaller and more regional networks are building out capacity for cross-border transactions, which could eat into growth a bit in the coming years.
Financial Strength:
Mastercard’s balance sheet is solid. The company added a small amount of debt to its balance sheet in 2014 and in the years since has steadily increased debt. Still, debt/EBITDA at the end of 2021 was a very reasonable 1.3 times, and Mastercard’s leverage is still a bit below Visa’s. It is predicted that debt will increase a bit more, but Mastercard will retain relatively modest leverage in the long run.
The company has shown a relatively limited appetite for M&A, and the business model requires very little balance sheet investment, so management has considerable flexibility. Given the integral nature of Mastercard to the global payment infrastructure, it is discredit that management would be eager to get too aggressive with its capital structure. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns. It is believed that the current amount of leverage strikes a reasonable balance.
Bulls Say:
Mastercard has been outperforming Visa in terms of growth. Its smaller size and some leveling in market share between the two could maintain this trend.
- There is still plenty of runaway for growth in electronic payments. Electronic payments only surpassed cash payments on a global basis a couple of years ago.
- Management is appropriately focused on long-term growth opportunities and not near-term margins.
Company Profile:
Mastercard is the second-largest payment processor in the world, having processed close to $6 trillion in purchase transactions during 2021. Mastercard operates in over 200 countries and processes transactions in over 150 currencies.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
