Arista Networks' growth in artificial intelligence-driven data center network switches could be thwarted by chipmaker Nvidia, says a Rosenblatt Securities analyst who on Friday downgraded Arista stock to sell.
On the stock market today, Arista stock plunged 8.6% to close at 271.22. Shares in Arista had climbed 26% in 2024 as of Thursday's market close.
Nvidia stock fell 2.7% to 881.86 as the Nasdaq composite pulled back on inflation and Mideast war worries.
Arista management has forecast $750 million in AI-related sales for 2025, with a good chunk of that coming from Ethernet network switches. In July, Arista joined with Cisco Systems, Hewlett Packard Enterprise and other companies to form the Ultra Ethernet Consortium.
Ethernet Switches Compete With InfiniBand
Ethernet network switches compete with Nvidia's InfiniBand chips, which whisk data from computer servers to storage devices. Nvidia acquired InfiniBand chipmaker Mellanox for $6.9 billion in 2020. However, Nvidia also has been developing Ethernet network switches just in case they take over the market.
Rosenblatt Securities analyst Mike Genovese on Friday said Nvidia's positioning in the data center market — it's the biggest seller of AI chips — gives it an edge in selling other products. That's because it can offer price discounts in bundled products.
Most of Arista's revenue comes from computer switches and routers that connect racks of computer servers in data centers with long-distance communications networks.
Nvidia Stock To Get 'Most Of The Spoils'?
Genovese lowered his price target on Arista stock to 210 from 330.
"Our view is Ethernet is a long-term winning technology, but Arista may not benefit as much as would be needed to support the current stock price or higher," Genovese said in a report.
As Ethernet gathers momentum, "most of the spoils will go to Nvidia" and not Arista, he said.
"Arista says it expects at least $750 million in new AI-related sales in 2025," Genovese said. "Based on our work, it looks like this should all come from one contract with a top 10, but not top 5, cloud provider. We are not seeing Arista having success anywhere else in the field, including at its two largest customers Microsoft and Meta Platforms. These titans are also large Nvidia customers, and we believe they are increasingly buying into Nvidia's total data center networking vision, including Spectrum Ethernet."
Arista Stock Technical Ratings
With Friday's retreat, Arista stock fell out of a buy zone. Also, Arista stock holds an entry point of 292.66. In addition, it owns a Relative Strength Rating of 94 out of a best possible 99.
Meanwhile, internet data centers will need more computing power and network bandwidth to process AI workloads.
Excluding investments in AI infrastructure, one issue for Arista stock is that cloud computing giants are spending less on data center gear.
Meanwhile, Arista's revenue boomed more than 48% in 2022. Further, in 2023, revenue climbed 34%.
For 2024, analysts polled by FactSet currently model sales growth of only 12%, to $6.6 billion.
Arista stock ranks No. 25 on the IBD 50 roster of growth companies. Both Nvidia and Arista are among AI stocks to watch. Nvidia stock has soared 83% in 2024.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
