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Why Arista Networks' Stock Fell 10% in 2018

What happened

Shares of Arista Networks (NYSE: ANET), a cloud-based networking company, were volatile in 2018 and ended the year down 10.6%, according to data provided by S&P Global Market Intelligence. The drop toward the end of the year may have been due to the fact that investors pulled back from the stock following a share price surge when the company was added the S&P 500 index.

So what

Investors seemed uncertain about Arista Networks' stock for much of 2018: The company's shares jumped 30% in the first few months of the year, only to see those gains retreat just a few months later. But the most significant share price gains and eventual losses came later in the year, after the company was added to the S&P 500.

Image source: Getty Images.

S&P Dow Jones Indices announced that Arista would be added to the S&P 500 index in August, and investor excitement about the company's potential pushed its share price up 17% during that month. The optimism was somewhat warranted, because once a company becomes part of a major index, mutual funds and ETFs that follow the index will have to purchase shares.

But after that initial spike, shares began tumbling in early September and never fully recovered. Some investors likely pulled back from the stock after taking into account that Arista's stock price surge in August was mainly due to the company's joining the S&P 500, and didn't stem from any underlying changes to its business.

Now what

Shares of Arista Networks have ticked up about 3% since the beginning of this year, and there's good reason for investors to be optimistic about the company, despite its 2018 drop. Arista's management expects sales for the recently ended fourth quarter (which will be reported next month) to be in the range of $582 million to $594 million. That would represent a year-over-year increase of about 26% at the midpoint, and even higher if sales reach the top end of guidance.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.

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