Motorola Solutions, Inc. (MSI) in Schaumburg, Ill., and Santa Clara, Calif.-based Arista Networks, Inc. (ANET) are two prominent players in the networking industry. MSI offers land mobile radio (LMR) communications, command center software, and video security and analytics, supported by managed and support services. It serves government, public safety, and commercial communication networks. In comparison, ANET develops, markets, and sells cloud networking solutions that use software innovations to address the needs of internet companies, cloud service providers, and data centers for enterprise support. It also provides post-contract customer support services.
Rising demand for cloud computing, data storage, and other efficient networking products has enabled the networking industry to grow substantially. Also, continuing adoption of hybrid working models, a growing interest in the metaverse, and the passage of a bipartisan Infrastructure bill that provides significant funding for networking and 5G companies, suggests the industry’s bright long-term growth prospects.
Growing investor optimism in this space is evident in the Invesco Dynamic Networking ETF’s (PXQ) 12.5% gains over the past three months, which surpassed the SPDR S&P 500 Trust ETF’s (SPY) 10% returns. The global network infrastructure market is expected to grow at 3.9% CAGR to $229.74 billion by 2026. So, both MSI and ANET are expected to benefit. But, while MSI shares have gained 6.4% in price over the past month, ANET has surged 15.9%. ANET is a clear winner with 86.2% gains versus MSI’s 42.3% in terms of past nine month’s performance. But which of these stocks is a better pick now? Let us find out.
On December 16, MSI acquired 911 Datamaster, Inc., a Next Generation 9-1-1 (NG9-1-1) data solutions provider. 911 Datamaster’s suite of NG9-1-1 location solutions helps ensure that emergency calls are accurately located and routed based on the caller’s location. This should enable MSI to lead in the command center solutions sector and further support the unique organizational workflows of 9-1-1 call centers as they transition to NG9-1-1 technologies.
On November 16, 2021, ANET joined the Microsoft Corporation’s (MSFT) Microsoft Intelligent Security Association (MISA), an ecosystem of independent software vendors and managed security service providers. Integrating ANET’s Network Detection and Response (NDR) platform and MSFT’s Microsoft Azure Sentinel enables faster remediation of threats by combining network context and threat detection with log-based and endpoint insights within Azure Sentinel.
Recent Financial Results
MSI’s net sales for its fiscal third quarter, ended October 2, 2021, increased 12.8% year-over-year to $2.11 billion. The company’s gross profit came in at $1.05 million, representing a 15% year-over-year improvement. Its non-GAAP operating earnings were $555 million, indicating a 19.9% rise from the prior-year period. MSI’s net earnings came in at $307 million, up 49.8% from the year-ago period. Its non-GAAP EPS increased 20.5% year-over-year to $2.35., and the company had $1.65 billion in cash and cash equivalents as of October 2, 2021.
For its fiscal third quarter, ended September 30, 2021, ANET’s total revenue increased 23.7% year-over-year to $748.70 million. The company’s non-GAAP gross profit was $486.08 billion for the quarter, up 24.3% from the prior-year period. Its non-GAAP income from operations was $293.71 million, representing a 26.9% rise from the year-ago period. ANET’s net income was $236.92 million for the quarter, representing a 23.4% rise from the prior-year period. Its non-GAAP EPS came in at $2.96, up 22.3% from the year-ago period. The company had $630.98 million in cash and equivalents as of September 30, 2021.
Past and Expected Financial Performance
MSI’s revenue and EBITDA have increased at CAGRs of 4.9% and 5.5%, respectively, over the past three years. The company’s levered free cash flow has grown at an 8% CAGR over the past three years.
Analysts expect MSI’s EPS to increase 17.7% year-over-year in the current year and 9.2% next year. Its revenue is expected to grow 10.4% year-over-year in the current year and 7% next year. And the company’s EPS is expected to increase at a 14.1% rate per annum over the next five years.
In comparison, ANET’s revenue and EBITDA have grown at CAGRs of 11.1% and 11.8%, respectively, over the past three years. The company’s levered free cash flow has grown at 13.4% CAGR over the past three years.
ANET’s EPS is expected to grow 22.6% year-over-year in the current year and 24.2% next year. The company’s revenue is expected to increase 25.6% year-over-year in the current year and 28.1% next year. However, analysts expect the company’s EPS to increase at an 18.3% rate per annum over the next five years.
In terms of forward EV/Sales, ANET is currently trading at 14.35x, which is 135.3% higher than MSI’s 6.10x. And in terms of forward EV/EBITDA, MSI’s 20.91x compares with ANET’s 36.14x.
MSI’s trailing-12-month revenue is almost 2.9 times ANET’s. However, ANET is more profitable, with a 64% gross profit margin versus MSI’s 49.4%.
Furthermore, ANET’s 32.6%, 28.3%, and 10.9% respective EBITDA margin, net income margin, and return on assets compare favorably with MSI’s 28.2%, 15.5%, and 10.7%.
While MSI has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ANET has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both MSI and ANET have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. MSI’s 21% trailing-12-month return on total capital is 321.3% higher than the 5% industry average. And ANET has a 15.1% trailing-12-month return on total capital, which is 201.9% higher than the 5% industry average.
MSI has a C grade for Value, which is in sync with its slightly higher-than-industry valuation ratios. It has a 23.57 forward EV/EBIT ratio, which is 9.6% higher than the 21.50x industry average. ANET’s D grade for Value reflects its overvaluation. ANET’s 37.58 forward EV/EBIT multiple is 74.7% higher than the 21.50x industry average.
Of 55 stocks in the C-rated Technology – Communication/Networking industry, MSI is ranked #12, while ANET is ranked #33.
Beyond what we have stated above, our POWR Ratings system has also rated MSI and ANET for Growth, Momentum, Stability, and Sentiment. Get all MSI ratings here. Also, click here to see the additional POWR Ratings for ANET.
Despite the ongoing chip supply shortage, the growing adoption of networking products across various industries is inviting significant corporate investments and policy support to this industry. Both MSI and ANET are well-positioned to benefit from these tailwinds. However, we think its relatively lower valuations make MSI a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology – Communication/Networking industry.
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MSI shares were trading at $273.38 per share on Wednesday afternoon, up $3.57 (+1.32%). Year-to-date, MSI has gained 62.90%, versus a 29.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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