Is ANET a Good Stock to Buy?

Arista Networks (NYSE:ANET) stock had an impressive run-up over the past decade, delivering returns of nearly 2,000%.

ANET share price continues to perform very well, soaring by more than 57% year-to-date. But that kind of momentum can only last so long before a pullback is warranted, so the question is what comes next?

Will this major player in the networking market experience a setback that will prove to be nothing but a speed bump before soaring further or has it reached a plateau and is due to fall?

Arista Has Top Tier Customers

Arista Networks has a few things in its favor. For one, it sits squarely at the center of a massive industry that offers software-defined cloud networking solutions for data centers and high-performance computing.

And since its public debut in 2014, it has grown its client base to more than 8,000, including serving household names like Meta Platforms, Inc. (NASDAQ:META) and Microsoft Corporation (NASDAQ:MSFT). In fact, these two tech titans are such massive users of the firm’s products that each has contributed more than 10% of Arista’s total revenue last year.

And now with exposure to both 5G and artificial intelligence, the company has all the hallmarks of riding a powerful technological wave over the next few years.

5G Is a Growth Driver

Next-generation telecoms have already migrated to 5G in the US and are on their way there in other countries. To support its telecom clients take full advantage of 5G technology, Arista has focused on three key areas that include fast data speeds, or low latency, high data capacity aka bandwidth, and the ability to scale services as needed.

Edge computing is a crucial part of this strategy because it means processing data close to where it’s generated, and so reducing delays. Arista uses small, local data centers that handle data nearby, minimizing the need to send it over long distances, which would otherwise be more time-consuming.

The company’s CloudVision platform is central to this approach because of its added 5G capabilities that manage and coordinate 5G network components, thereby enabling different parts of the network to work together effectively.

Management has also made concerted efforts to invest in high-performance switches and routers that lead in the 5G market. The goal of these devices is to handle the increased data traffic of 5G networks and are scalable to prevent them from becoming outdated quickly.

Arista’s products facilitate fast data routing, the ability to handle many connections, large data storage, integrated long-distance data transmission technology, and secure encryption.

What it all boils down to is a big market opportunity because the 5G market is expected to grow fast due to increased investment and the availability of 5G devices. Some estimates project the global 5G market will reach $427.7 billion by 2028, growing at an annual rate of 34.2%.

Is Arista Networks An AI Stock?

Arista Networks is making efforts to strengthen its AI functionality and improve its family of networking solutions by refining features designed to take full advantage of artificial intelligence as it relates to networking management and automation.

Both machine learning and artificial intelligence have been integrated into EOS and CloudVision in order to help the platforms anticipate the need for maintenance, identify and analyze changing traffic patterns in real time, and deliver more sophisticated security.

Furthering the theme, management has announced a demonstration of AI Data Centers in collaboration with NVIDIA, an initiative aimed at aligning compute and network domains into a single managed AI entity.

By giving customers the ability to configure, manage, and monitor AI clusters uniformly across networks, NICs, and servers, Arista should help to lower job completion times. Albeit just a first step, this demo is designed to create a multi-vendor, interoperable ecosystem that facilitates control and coordination between artificial intelligence networking and AI compute infrastructure.

Management also recently unveiled the Arista Etherlink AI platforms, which were designed to deliver enhanced network performance for intensive AI applications, including training and inferencing.

Overall, Arista sets itself apart from competitors through more sophisticated solutions for modern data centers and cloud networks. There is no doubt that current technology trends show AI is becoming increasingly relevant in networking, creating a favorable landscape for Arista’s core competence. 

How Is Arista Networks’ Financial Performance?

Arista Networks delivered strong financial and operational results for Q1 2024. The company booked revenue of $1.57 billion, which is a 16.3% increase compared to the same period in the previous year.

This revenue is evidence of the demand for Arista’s enhanced network equipment and accessories, and highlights just to what extent the company is a major player in data center switching and routing, among other areas of networking infrastructure.

Management reported a non-GAAP net income of $637.7 million, or $1.99 per share, compared to $452.5 million, or $1.43 per share, in the first quarter of 2023.

This growth in net income reflects the company’s capacity to manage operational expenses alongside business growth and demonstrates Arista’s ability to balance competitive pricing with healthy profit margins, a significant skill as market competition increases and market dynamics change. The leadership team has projected revenue between $1.62 billion and $1.65 billion for the second quarter.

Is ANET a Good Stock to Buy?

Although ANET is a good stock to buy for the long-term, the valuation is stretched in the short-term with fair value sitting at $357 per share according to 21 analysts.

Arista’s ability to increase profits consistently appears promising based on the company’s growing revenue and new product developments. With increasing market share, growing customer base, and continuing development of leading edge products, Arista has established itself as a core supplier of influential network equipment and support in this segment of technology.

As AI consumption grows and 5G capabilities expand, analysts expect Arista to enjoy tailwinds and 12 out of the 20 who cover the stock have rated it a Buy. In other words, Arista stock may be a smart addition for portfolios with a long-term investment horizon.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.