Arista Networks, Inc. (ANET) in Santa Clara, Calif., is a supplier of cloud networking solutions that use software to address the needs of internet companies, cloud service providers, and enterprises. The company’s end customers span a range of industries and include large internet companies, service providers, financial services organizations, government agencies, media and entertainment companies, and others. HP Inc. (HPQ) is a global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health and education sectors. Its segments include Personal Systems, Printing, and Corporate Investments. HPQ is headquartered in Palo Alto, Calif.

As remote working and online education have become the norm amid the pandemic, the demand for computers and computer components has surged. In addition, a growing interest in gaming has also driven the need for computer hardware. The PC market has witnessed double-digit growth over the last two years. However, the industry continues to be hampered by supply disruptions and logistical challenges, causing demand to outstrip supply. Supplies of crucial computer accessories, such as chipsets, sensors, processors, hard drives, panels, and monitors, have been badly hit. But experts expect the industry to continue growing. According to the International Data Corporation (IDC) report, the PC market is expected to grow at a 3.3% CAGR till 2025.

ANET’s stock has gained 55.1% in price over the past six months, while HPQ has gained 38.1% in price over the same period. However, HPQ’s shares have gained 2.2% year-to-date, while ANET’s shares have declined 2.8%. Furthermore, HPQ’s shares have gained 2.3% over the past three months, in contrast to ANET’s 1.5% decline during the same period.

Which is a better stock to buy now? Let’s find out.

Latest Developments

On Feb. 23, 2022, ANET announced its 720XP series of switches for embedded security and packet analysis. Customers will be able to derive broader visibility and threat hunting across the modern cognitive campus by embedding NDR (Network Detection and Response) capabilities into the Arista EOS-based switches. ANET’s VP and General Manager of Cybersecurity and CISO, Rahul Kashyap, said, “By building NDR capabilities into the switching infrastructure itself, Arista enables a built-in, secure network that reduces organizational risk by speeding up both time to detection and time to remediation.”

On February 10, 2022, HPQ announced the acquisition of Choose Packaging, a packaging development company and inventor of the only commercially available zero-plastic paper bottle globally. HPQ’s Chief Strategy & Incubation Officer Savi Baveja said, “This acquisition is a great example of how we continue to strengthen our capabilities in attractive verticals like sustainable packaging while also driving progress against HP’s broader sustainability goals.”

Recent Financial Results

ANET’s revenues increased 27.1% year-over-year to $824.45 million for the fourth quarter, ended Dec. 31, 2021. The company’s non-GAAP net income increased 32.7% year-over-year to $262.41 million. Also, its non-GAAP EPS came in at $0.82, representing a 32.2% increase year-over-year. In addition, its non-GAAP gross profit increased 25.8% year-over-year to $530.42 million.

HPQ’s net revenue increased 8.8% year-over-year to $17.02 billion for the first quarter, ended Jan. 31, 2022. The company’s non-GAAP net earnings increased 1% year-over-year to $1.20 billion. Also, its non-GAAP EPS came in at $1.10, representing a 20% increase year-over-year. In addition, its free cash flow increased 55% year-over-year to $1.40 billion.

Past and Expected Financial Performance

ANET’s revenue and EBITDA have grown at CAGRs of 11% and 11.3%, respectively, over the past three years. Analysts expect ANET’s revenue to increase 30.5% in the current year and 14.6% next year. The company’s EPS is expected to grow 26.5% in the current year and 15.2% next year. Furthermore, its EPS is expected to grow at a rate of 17.6% per annum over the next five years.

In comparison, HPQ’s revenue and EBITDA have grown  at CAGRs of 3.4% and 10.7%, respectively, over the past three years. Analysts expect HPQ’s revenues to increase 4.1% in the current year and decline 0.1% next year. The company’s EPS is expected to grow 13.3% in the current year and 4% next year. And the company’s EPS is projected to grow at a 10% rate per annum over the next five years.

Profitability

HPQ’s trailing-12-month revenue is 21.9 times ANET’s. However, ANET’s 28.52% and 63.80% respective net income and gross profit margins are higher than HPQ’s 10.05% and 20.78%.

In contrast, HPQ’s 71.33% and 16.76% respective ROC and ROA are higher than ANET’s 15.48% and 14.66%.

Valuation

In terms of forward EV/EBIT, ANET is currently trading at 25.68x, which is 225% higher than HPQ’s 7.90x. Moreover, ANET’s 38.44x forward non-GAAP P/E is 328.5% higher than HPQ’s 8.97x.

So, HPQ is more affordable.

POWR Ratings

ANET has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. On the other hand, HPQ has an overall B rating, which equates to a Strong Buy. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

ANET has a Value grade of D. This is justified because  the stock’s 9.78x forward EV/S multiple is 200.1% higher than the 3.26x industry average. In comparison, HPQ has a B grade for Value. This is justified because its 0.68x forward EV/S is 79.2% lower than the 3.26x industry average.

Both stocks have a B grade for Quality, in sync with their higher than industry profitability ratios.

Among the 54 stocks in the C-rated Technology – Communication/Networking industry, ANET is ranked #18. However, HPQ is ranked #10 among 45 stocks in the B-rated Technology – Hardware industry.

Beyond what I have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the ANET ratings. Also, get all the HPQ ratings here.

The Winner

With continuing hybrid work, online education, and rising interest in gaming, the demand for computer hardware is expected to increase. While both ANET and HPQ are expected to gain, we think it is better to bet on HPQ now because of its lower valuation and robust financials.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology – Communication/Networking industry here. Also, click here to access all the top-rated stocks in the Technology – Hardware industry.

ANET shares were trading at $137.92 per share on Friday morning, down $1.75 (-1.25%). Year-to-date, ANET has declined -4.06%, versus a -4.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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