Arista Networks is the IBD Stock Of The Day as shares of the computer networker surged for a second straight day Friday amid a Nvidia-stoked rally in artificial intelligence plays. ANET stock had been consolidating after selling off on the company's first-quarter earnings report and outlook.
On the stock market today, Arista stock jumped 9.1% to close at 170.35. That came after ANET stock shot up more than 10% Thursday after chipmaker Nvidia reported its own first-quarter earnings and raised its full-year outlook.
With its two-day gain, ANET stock has surged above its trendline in heavy volume. Also, Arista stock has neared a traditional 171.54 buy point.
From here, ANET stock could be actionable if it claws above the 171.54 entry point. But if ANET stock breaks below its 50-day moving average, it would be a sell signal.
According to FactSet, no Wall Street analysts upgraded ANET stock Thursday or Friday. So the rally seems to be driven by retail investors.
ANET stock holds a Relative Strength Rating of 95, according to IBD Stock Checkup.
ANET Stock: CFO Cautious On AI
Nvidia's profit and revenue both fell from a year earlier but topped estimates. In addition, Nvidia forecast July-quarter revenue of $11 billion, nearly $4 billion ahead of analyst estimates. Nvidia is the leading supplier of AI chips used in data centers.
NVDA stock has jumped 166% in 2023. ANET stock has gained 39%.
For investors homing in on AI stocks, the valuation of NVDA stock takes center stage among those who fear an artificial intelligence bubble. The same applies to ANET stock. ANET stock rallied this week on views that if tech companies are buying more AI chips, they'll also invest in computer networking bandwidth.
At a JPMorgan tech conference on May 23, Arista Chief Financial Officer Ita Brennan talked cautiously about a potential AI boost.
"I mean, I think for us it's early," Brennan said. "Jayshree (Chief Executive Jayshree Ullal) talked on the (Q1) earnings call about the fact that we're at the beginnings of understanding what AI really means and what the technology will look like."
Brennan added: "We have deployed some AI use cases, but it's relatively small. I think we look at it as, it's a good underpinning of kind of future momentum and demand, particularly from some of the larger hyperscale customers."
Meta, Microsoft Big Customers
Arista sells computer network switches that speed up communications among racks of computer servers packed into "hyperscale" data centers. These internet data centers are designed to ratchet up computing horsepower when demand surges.
In 2022, Facebook-parent Meta Platforms accounted for 26% of Arista revenue. Arista captured 16% of its sales from Microsoft.
ANET stock sold off May 1 despite reporting earnings and sales that handily beat estimates.
For the June quarter, Arista predicted revenue of $1.35 billion to $1.4 billion, edging by estimates of $1.35 billion.
Arista's revenue boomed more than 48% in 2022 as Facebook and others increased data center spending. In 2023, analysts predict revenue growth of 26%. In 2024, analysts currently model sales growth of only 12%.
For analysts, debate over the valuation of ANET stock has hinged on how much revenue growth will slow. But analysts may be recalibrating on how soon AI sales will kick in following Nvidia's raised guidance.
ANET Stock: AI A Long-Term Play?
"We think ANET could ultimately exceed its 26% revenue guide as we go through 2023, as demand remains strong. Recent capex updates from large cloud players are slightly positive especially as Microsoft is set to sharply increase capex for next quarter," Barclays analyst Tim Long said in a recent note to clients.
He added: "We see possibilities for AI to open bigger opportunities for ANET at some under penetrated cloud networks, particularly Google Cloud Platform."
According to analysts, Arista is gaining ground in the so-called "enterprise" market — large companies, government agencies and educational institutions.
"We believe that AI networking can be a $8 billion opportunity over the next five years, with ANET being one of the biggest beneficiaries," Morgan Stanley analyst Meta Marshall said in a recent note. "Additionally, AI revenue is expected to contribute later in 2023, but is a far larger opportunity in 2024 and 2025, making near term volatility in cloud spend most impactful to ability to achieve 26% growth target for 2023."
Arista Stock Composite Rating
Arista sells switches that speed up communications among racks of computer servers packed into data centers. Its chief rivals are Cisco Systems and Juniper Networks.
ANET stock has an Accumulation/Distribution Rating of B. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
