One of the worst performing stocks in my portfolio has been Arista Networks. I wrote a memo about a month ago revisiting the investment thesis and ultimately decided to keep it. (Arista competes with Cisco Systems selling network switching equipment, but the thesis has to do with the enormous data usage of Machine Learning as a long term trend).

Today after hours $ANET is up 10.59% because earnings per share were $2.42, which was higher than the average Wall Street estimates of $2.22 per share. CEO Jayshree Ullal also told analysts that she is confident Arista Networks can meet Wall Street’s expectation that its sales will rise by thirteen to fourteen percent next year.

Oooo yay a beat of estimates- great news right? Not so fast. Remember we're on Commonstock for signal over noise. Part of that is learning to identify what is signal and what is noise, and why.

Here's the important investing lesson to identify here: Earnings estimates are not a good metric to base investment decisions off of.

Ask yourself this: "Why did Arista's stock go up so much today?" Well, it wasn't revenue growth; Covid has been a headwind this year. Fewer companies are spending on networking equipment for office buildings when fewer employees are going into the office. Arista's business performance bears this out: revenue in the three months ended in September declined by 7.5%, year over year.

It's pretty clear the stock went up simply because of the beat of analyst expectations and the pseudo-promise that expectations will be met next year.

This is one of those dynamics in the financial world that you can't see until someone points it out to you, but once you see it, you can't unsee it:

When a company reports, the main thing that the headlines pick up is whether the earnings beat or missed analysts' estimates. This is because the media is using analysts estimates as a quick way to say if the result was good or bad.

Therefore, the estimates game is only about whether the earnings and revenue beat or miss a number that some analysts have picked. But it ignores the question of how well the company is actually doing, and how bad (or good) the revenues and earnings really are.

You should not base your perception of a company on the analyst estimates. They're all just fallible humans just like we are. They're always off by some degree. For example, 26 analysts cover Arista and not a single one of them got the earnings right. And it wasn't like they all danced around the right number and no one hit a bullseye. The highest estimate of all of them was well below what earnings actually came in at.

And yet the price moved because the analysts are the one's telling their employers whether to buy the stock or not. You have to admit, it makes sense that a CEO who tells analysts that they are smart (aka "we think we can hit your estimates for next year") will get their stock upgraded the next day.

This is noise. Refrain from basing your investment thesis on analyst expectations.