3 Reasons Arista Networks Could Soon Rally Significantly

In 2023, we covered Arista Networks ANET , calling it part of the internet’s "bedrock" but rating it a Hold due to valuation concerns. Since then, ANET has outperformed the S&P 500, proving our call wrong.

Recently, ANET’s stock has dipped alongside broader market declines. However, we believe the selloff presents a buying opportunity, given ANET’s strong positioning in AI and cloud growth. Here’s why:

1. Strong Growth Drivers
ANET’s revenue comes from three segments: Core (65%), Cognitive Adjacencies (18%), and Cognitive Network (17%). Its hardware (Ethernet switches, routers) and software (EOS) are critical for hyperscalers (48% of revenue), enterprises (35%), and providers (17%). With AI and cloud capex surging, ANET is well-positioned for sustained demand.

2. Best-in-Class Margins
ANET’s net margins have nearly doubled since 2020, reaching ~42% TTM. Operating leverage allows revenue growth to flow efficiently to the bottom line. While R&D spending must remain competitive, ANET’s high-margin business supports strong earnings.

3. Attractive Valuation
Despite premium multiples (14x sales, 35x earnings), ANET trades near 5-year lows relative to historical trends. If growth (projected ~20%) and margins hold, a re-rating toward its average P/E (~40x) could drive shares toward $100+.

Risks
- Customer concentration (Meta + Microsoft = 35% of revenue).
- Margin pressure if R&D spending lags.
- Multiple compression in a weak market.

Verdict: Buy
ANET’s growth, margins, and valuation make it compelling. While risks exist, the upside outweighs them.

Good luck out there!