We're Adding to 2 Holdings on Near-Term Market Overreactions
We are also reducing the price target for one and upgrading our rating on the other.
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| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
ANET | Buy | 415 | 139 | 1,000 | 2.5 |
AXON | Buy | 47 | 565 | 355 | 3.6 |
When the stock market opens later this morning, we will make the following trades:
-- Buy 415 shares of Arista Networks (ANET) at or near $139. Following the trade, ANET shares will account for roughly 2.5% of the Pro Portfolio.
-- Buy 47 shares of Axon Enterprise (AXON) at or near $565. Following the trade, AXON shares will account for roughly 3.6% of the Pro Portfolio.
When we exited the shares of Vulcan Materials (VMC) last week, we not only locked in a massive gain for the Pro Portfolio, but we also re-armed our cash position, a purposeful move so we could take advantage should any opportunities present themselves to us as the September-quarter earnings season continued.
As we saw with the market’s reaction to Palantir’s (PLTR) quarterly results earlier this week, even if a company puts up results that best expectations across the board, it may not be enough given the current market mood. And yet yesterday and today, as cooler heads emerged, we have seen price target increases for PLTR shares, and we are starting to see the same for Eaton (ETN) .
What this tells us is despite the market’s initial reaction to a company’s earnings report, the smart move is to focus on the underlying business, its demand and margin prospects, and determine if the market’s response is overdone and if any adjustments to our thinking need to be made along the way. What we saw in Palantir and Eaton’s results and quarter-to-date market developments led us to maintain our price targets.
Arista: Deferred Revenue Gains Mean Looking Past Lumpy Revenue Guidance
With Arista Networks, September-quarter results came in ahead of market expectations, but it delivered top-line guidance for the fourth quarter of $2.3 billion-$2.4 billion vs. the $2.33 billion market forecast. When we compare that against the $2.31 billion posted in the September quarter, the initial question is, even though the year-over-year growth rate is still above 20%, why is there very little sequential growth? The answer is one we’ve come to expect in the AI and data center space – capacity constraints and project timing, which, as we’ve seen, can result in lumpy quarters, although the takeaway is that demand is larger than the ability to ship.
We saw it earlier this year with Nvidia (NVDA) , a few months ago, as Marvell (MRVL) was waiting for one of its AI silicon customers to ramp in the current quarter, and we are seeing it near-term with Arista. However, we are also seeing AI and data center capacity-constrained Big Tech companies once again lift their capex spending higher next year.
With that in mind, we’ll look past lumpy quarters and focus on the rising capacity levels to come and what that means for electricity demand in the case of Eaton and networking for Arista. Offering some comfort on that front, Arista management reiterated its 2026 revenue guidance of 20%, which now puts that bogie at ~$10.65 billion. Backing up that guidance, Arista’s total deferred revenue rose to $4.7 billion exiting the September quarter compared to $4.06 billion at the end of the June one. Given more recent data-center announcements and commitments, we should see that figure step up further in the current quarter, giving more visibility and comfort for 2026 when Arista reports early next year.
That is leading us to take advantage of this morning’s pullback and scoop up more shares as we reiterate our $180 target and upgrade ANET to a One rating. We may be a tad early on this, but we suspect that as cooler heads emerge, the odds of the shares being near current levels are low.
Axon: Mix and Margins Prompt a Price Target cut to $800
We are also scooping up additional shares of Axon following the sharp selloff in the shares. Once again, Axon delivered a top-line beat for its September, continuing its string of more than 30% year-over-year revenue gains, driven by a 41% surge in software and services sales to $305 million and a 24% increase in connected devices revenue to $405 million. Annual recurring revenue climbed 41%, year over year, to $1.3 billion, while net revenue retention held steady at 124%. More importantly, future contracted bookings climbed to $11.4 billion, a nice step up from $10.7 billion exiting the June quarter, and that led Axon to nudge its full-year revenue outlook to approximately $2.74 billion, up from a previous range of $2.65 billion-$2.73 billion.
All very positive developments, especially when we factor in the company’s AI offerings are tracking to account for ~10% of total bookings in 2025. However, we can’t hide from the fact that Axon, a company with a track record of beating bottom-line expectations, came up short this time around. For the September quarter, adjusted EPS came in a $1.17, well short of the $1.54 consensus, and that is what hammered the shares in after-market trading last night.
The bulk of the miss can be traced back to two factors – revenue mix that moved against the company as Axon delivered its first full quarter impacted by tariffs, and a larger-than-expected jump in operating expenses as Axon continues to invest in AI, drones, and other initiatives. Compared to the adjusted EBITDA of $177 million delivered in the September quarter, management targets $178 million-$182 million in the current one, which means Axon narrowed its 2025 adjusted EBITDA guidance to $681 million-$685 million from its prior guidance of $665 million-$685 million in June and $650 million-$675 million earlier this year.
While we are very disappointed in the management team for, in our mind, what should have been a pre-announced quarter, the underlying narrative for Axon remains essentially intact. However, we have to address the issues discussed above, and that means a more restrained cadence of margin improvement that flows through to the company’s bottom line.
As such, even though we are picking up more AXON shares this morning, given the pronounced market reaction, we are cutting our price target to $800 from $860. Should we learn the company’s margins are improving quicker than expected, we will revisit that target. We will have multiple opportunities for that, given Axon will be presenting at two investor conferences later this month and three in the first half of December.
(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)
At the time of publication, TheStreet Pro Portfolio was long ANET, AXON, PLTR, ETN, MRVL and NVDA.
