After Earnings, Is Arista Stock a Buy, a Sell, or Fairly Valued?

Arista Networks ANET released its fiscal first-quarter earnings report on Feb. 18. Here’s Morningstar’s take on Arista’s earnings and stock.

Key Morningstar Metrics for Arista Networks

• Fair Value Estimate: $82.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Arista Networks' Earnings

Arista’s fourth-quarter results eclipsed all of management’s guidance ranges. Revenue rose 25% year over year to $1.93 billion. First-quarter guidance implies more than 20% year-over-year growth, with a revenue midpoint of $1.95 billion.

Why it matters: Results and guidance both were close to our above-consensus expectations. We believe Arista’s strong growth over 2024 benefitted greatly from generative artificial intelligence investment, and we expect this dynamic to continue into 2025, with AI becoming a primary growth driver.

• Arista is enjoying strong placement in generative AI clusters. This aligns with our share-taking thesis for the firm, with its Ethernet switching portfolio winning over Nvidia’s proprietary networking products due to better performance and higher interoperability.
• We see Arista’s AI revenue targets as conservative, underrepresenting its total revenue opportunity from generative AI investment. We expect its actual AI revenue in 2025 to be significantly above management’s $1.5 billion target.

The bottom line: We’ve raised our fair value estimate for Arista to $82 per share from $75 after slightly raising our growth forecast and incorporating the time value of money after rolling our model forward for another year. In our view, shares remain overvalued.

• Our forecasts for Arista’s revenue and profitability in 2025 come in above management’s guidance, which we see as conservative. Management already raised its expectations for 2025 revenue (to 17% growth, from a midpoint of 15%) a quarter after providing initial guidance.

Despite beating FactSet consensus estimates, shares fell by 5% after hours, indicating that investors in the stock had even higher expectations. We continue to see overly rosy growth expectations priced into the stock, even compared with our above-consensus forecasts over the next three years.

Fair Value Estimate for Arista Networks

With its 2-star rating, we believe Arista stock is overvalued compared with our long-term fair value estimate of $82 per share. Our valuation implies a 2025 enterprise value to sales multiple of 12 times and 2024 adjusted price/earnings multiple of 33 times. The greatest drivers to our valuation are growth in high-speed data center switching as well as broad-based market share gains.

Read more about Arista Networks’ fair value estimate.

Economic Moat Rating

We assign Arista a wide economic moat based on intangible assets in high-speed networking and customer switching costs. We view Arista’s high-speed switches and software-led approach as significantly differentiated from other networking competitors and difficult to replicate. We expect strength in high-speed switching to generate economic profits for Arista over the next 20 years.

Arista’s networking switches for high-speed applications are best of breed, in our view, resulting from a software-led approach over its networking hardware. Arista’s specialty within networking is high-speed switches, at speeds of 100 gigabits or more, that are designed for data centers. These switches create a local network to then connect to a wider network and the internet. Data traffic continues to explode, increasing the need for Arista’s gear.

Read more about Arista Network’s economic moat.

Financial Strength

We view Arista’s balance sheet and cash flow generation as very strong. Going forward, we expect it to focus its cash flows on organic investment first, followed by opportunistic repurchases. Arista had a net cash position of $8.3 billion as of Dec. 31, 2024, with no debt on its balance sheet. It has consistently covered its obligations and organic needs with strong free cash flow. We forecast it to average more than $3 billion in annual free cash flow through 2029 as volume grows. Though Arista has historically focused its cash wholly on organic investment, we believe its newfound acquisition and repurchase programs have been prudent. It has returned more than 25% of free cash flow to shareholders via repurchases since 2020 while bolting on several small, technology-focused acquisitions. We expect repurchase activity to ramp up over the next five years as a way for Arista to spend its excess cash, and we don’t expect any larger acquisition activity.

Read more about Arista Networks’ financial strength.

Risk and Uncertainty

We assign Arista a High Uncertainty Rating. Its sales are concentrated in the cloud networking market, which can exhibit cyclicality and lumpy spending patterns from customers. This lumpiness can be exacerbated by Arista’s concentration in customers like Microsoft and Meta Platforms. Softer spending patterns at these customers can cause top-line performance to suffer, as seen in 2019 and 2020 when Meta skipped an upgrade cycle.

Arista is working to expand its presence in the larger enterprise market, both in on-premises data centers and campus environments. Arista’s market share in on-premises data centers trails its presence in high-speed cloud setups, and it has historically not participated in the campus setting. We think its efforts to penetrate these markets create uncertainty. Arista breached the cloud market with cutting-edge high-speed performance, but it may struggle to match the comprehensive portfolio of Cisco—inclusive of cybersecurity and collaboration software—for smaller customers and campus environments. If it is unable to make inroads, its performance could suffer.

Read more about Arista Networks’ risk and uncertainty.

ANET Bulls Say

• Arista has gained a top market share position in high-speed switching, and it continues to gain shares.
• Arista holds best-in-class profit margins and earns robust economic profits, reflecting its strong value proposition and wide economic moat.
• Arista earns heady free cash flow, which it can use for organic investment and shareholder returns.

ANET Bears Say

• Arista has a weaker position in networking areas outside high-speed switching, and it may struggle to expand into adjacent markets.
• We see higher competition for Arista within generative AI spending, with Nvidia holding a large incumbency via bundles of its proprietary networking equipment with its GPUs.
• Arista’s acquisition history is small and new, and it could risk destroying shareholder value with ill-advised deals.

This article was compiled by Aman Dagra.