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Shares of Arista Networks (ANET) have been on an absolute tear since the company's initial public offering (IPO) in June 2014. ANET stock has more than doubled in the past year, up 106% over this time frame, and the stock has gained 1,905% in the past 10 years, creating game-changing wealth for long-term shareholders.
Let’s see if the networking company has the potential to deliver outsized gains at the current multiple.
Is Arista Networks Stock Still a Good Buy?
Valued at $127.6 billion by market cap, Arista Networks (ANET) develops, markets, and sells cloud networking solutions to enterprises globally. These solutions consist of operating systems, networking applications, and ethernet switching and routing platforms. The company also provides contract customer support services, which include technical support, hardware repair, and parts replacement. It serves internet companies, government agencies, media companies, and financial services organizations, among others.
A key driver of Arista’s stock price is its revenue expansion, as its top line has risen to $6.3 billion in the last 12 months, up from $2.4 billion in 2019. Its operating income has more than tripled to $2.6 billion in this period. Notably, the company has reported a free cash flow of $2.7 billion in the past year, up from $947 million in 2019.
Arista Networks is a pure-play networking company that has valued its total addressable market at $70 billion, which suggests its growth story is far from over. In Q2 2024, it reported revenue of $1.69 billion and adjusted earnings per share of $2.10. Services and Software Support renewals now account for 17.6% of the top line, diversifying its revenue base and cash flow.
With a gross margin of 65.4%, Arista Networks has focused on manufacturing discipline and realizing cost reductions amid a sluggish macro environment. Due to a reduction in inventory-related reserves, its gross margins improved by almost 3 percentage points year over year.
Arista Networks is Part of the AI Segment
Investors might be concerned about Arista’s decelerating revenue growth, as it trades at a lofty valuation in 2024. For instance, its sales have risen by 20% year over year in the last four quarters, compared to a 34% growth in 2023 and a 48.6% growth in 2022.
Arista Networks is also part of the artificial intelligence (AI) megatrend, as its ethernet networking platform is built to run workloads created by training processes. Its portfolio of products integrates multiple computer-processing units and aims to solve large data-crunching bottlenecks for AI players.
A report from Mordor Intelligence projects the AI hardware market to expand at a compound annual growth rate of 26% through 2029. Meanwhile, Arista Networks expects to grow its sales by 17% to $1.73 billion in Q3 of 2024.
While Arista has over 10,000 customers, Microsoft (MSFT) and Meta Platforms (META) account for almost 40% of the company’s total sales. This customer concentration is a significant risk for investors, but the two mega-cap companies continue to spend heavily on AI to gain an early-mover advantage.
What's the Target Price for ANET Stock?
With an operating margin of over 40%, Arista Networks benefits from a scalable business model and a software-driven architecture. It is now seeing strong demand from customers building AI data centers, and might be a top long-term investment option in that segment.
That said, analysts tracking the tech stock expect ANET to increase adjusted earnings from $6.94 per share in 2023 to $9.47 per share in 2025. So, priced at 42.6x forward earnings, ANET stock is expensive, even though annual earnings growth is forecast at 19.4% through 2028.
Similarly, even though the 22 analysts covering ANET stock have a consensus rating of “moderate buy,” the average price target among this group is $390.63, about 3% lower than the current share price.
