Nvidia just keeps getting stronger, and that could be trouble for this stock
By Emily Bary
Arista Networks' stock gets a double downgrade at Rosenblatt over the threat posed by Nvidia in switching
Wall Street may be overestimating Arista Networks Inc.'s ability to capitalize on artificial-intelligence, and that's partly because "Nvidia keeps getting stronger."
At least, that's the view of Rosenblatt Securities analyst Mike Genovese, who double-downgraded Arista shares (ANET) to sell from buy in a Friday morning report. He also dramatically reduced his price target - to $210 from $330.
Arista shares are off nearly 8% in Friday morning trading to pace S&P 500 SPX laggards. The stock closed Thursday at $296.58, and Genovese's new $210 target implied almost 30% downside from there.
The shares have gained 26% over so far this year, and investors seem optimistic about the company's ability to benefit from the AI craze with its Ethernet business, according to Genovese. "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," he said.
As Ethernet continues to get momentum, "most of the spoils will go to Nvidia" and not Arista, in his view.
Don't miss: Nvidia and these other chip stocks named top plays into earnings season
Nvidia (NVDA) has a few advantages in its favor, from Genovese's perspective. For one, the company dominates the market for graphics processing units and also sells networking products like network interface cards, or NICs. That sets the company up to bundle switching offerings and price its products in a way that undercuts traditional vendors.
Additionally, the market may not fully realize how big Nvidia's Ethernet position is, or how much of a lead the company has on some of its rivals.
"It looks like Nvidia told the truth at GTC about it's Ethernet platform having a large lead on others in the AI market. We believe Nvidia has access to the largest and the highest volume of Ethernet switching fabrics today, versus competitors like [Broadcom, Marvell and Cisco], the most appropriate and functional networking operating system for AI and acombined 2+ year lead on others in the industry," he wrote.
Read: Nvidia's stock has had a killer run. Why it's still Morgan Stanley's top AI-chip pick.
As for Arista, Genovese worries about the potential for the stock's multiple to fall if the magnitude of the company's AI opportunity doesn't live up to investor expectations.
"The company will likely continue to gain enterprise share, but this type of business typically does not support super-high operating margins and super-premium EPS multiples," he wrote, referring to earnings per share.
-Emily Bary
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04-12-24 1132ET
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