Arista Earnings: Valuation Up to $160 From $150 After Results and Guidance Beat Our Expectations

We raise our fair value estimate for shares of wide-moat Arista Networks ANET to $160, from $150, after the firm’s third-quarter results and fourth-quarter guidance beat our expectations. Arista is putting together an impressive year of results in 2023, reflecting market share gains in the enterprise market and ongoing cloud titan spending driven by artificial intelligence buildouts. We see Arista as the preferred choice for the highest-speed networks with its hardware and software design prowess, allowing it to be a beneficiary of cloud AI spending and reflecting its wide economic moat. Nevertheless, we continue to find valuation challenging and recommend investors wait for a pullback in this high-quality stock.

Third-quarter sales rose 28% year over year and 3% sequentially to $1.51 billion. Arista’s proficiency at the highest networking speeds allows it to reap the benefits of spending brought on by investments in generative AI. While we continue to see Nvidia’s Infiniband technology being bundled with its GPU sales for communication between GPUs in the near term, we also see AI builds prompting network refreshes and new demand for Arista’s ethernet switches for the “front-end” part of the network that links AI clusters with the rest of the network. Longer-term, we still expect ethernet to permeate the “back-end” parts of networks and give Arista an even larger opportunity to compete.

Non-GAAP gross margin of 63% rose nearly 2% sequentially and year over year and is a strong level for Arista. We believe ongoing margin expansion in 2023 is being driven by share gains in enterprise customers, and management also credits reduced supply constraints.

Management guided for sequential sales growth to a midpoint of $1.525 billion in the fourth quarter, which also implies a raise to full-year sales guidance, to 33% from 30% previously. The guidance also calls for non-GAAP gross margin to stabilize around 63%.