When Meta needed to build out its AI infrastructure on an unprecedented scale, it didn’t turn to the traditional giants of the tech world, choosing Arista Networks (ANET). The company’s journey from network upstart to AI infrastructure powerhouse tells a compelling story about where the real value lies in the artificial intelligence revolution. Even after an 83% increase in the past year, I am bullish on ANET stock as I believe there is still a long way to go before the company’s shares reach fair value.
Over the past decade, I’ve watched Arista methodically dismantle Cisco’s (CSCO) dominance in high-speed networking. The numbers tell the story: from a modest 3.5% market share in 2012, Arista now has 33.2% of the high-speed network market. Even more telling, they have captured 45% of the crucial 100G/200G/400G switch port segment, where AI workloads demand maximum performance. Cisco, the former giant, has seen its share of this crucial segment shrink to just 20%.
With this sector only likely to grow as the adoption and sophistication of these systems increase over time, the future looks bright for the sector, but I would say that especially for Arista. However, growing market share is not just about acquiring business from competitors. A total addressable market (TAM) of $70 billion by 2028 shows how ANET is expanding and reshaping the entire industry.
Recent releases from Arista underscore the scale of this transformation, with the launch of 54 new platforms, including breakthrough AI networking solutions, 800G optics and advanced WAN routing systems. Six major software releases also delivered more than 600 new features. What makes the story particularly compelling from my perspective is how the company has become indispensable to the world’s largest technology companies. Most notably, they have done this while maintaining their independence and avoiding over-concentration.
I am encouraged to see that the company’s Q3 2024 results confirm my positive attitude. Sales increased 20% since last year to $1.8 billion. Even more impressive, it does this with industry-leading gross margins of 64.6% and operating margins of 49.1%.
But what excites me most is Arista’s diversification. The revenue mix shows a thoughtful balance of 40-45% coming from cloud and AI titans, 35-39% from the corporate and financial sectors, and 20-25% from service providers and second-tier cloud companies. I think the business opportunity is particularly attractive when you consider that Arista has only penetrated 20% of Fortune 500 companies – which represents a huge untapped market.
Geographically, the US market clearly dominates with 81.7% of sales, but the growing presence in EMEA (10.6%) and APAC (7.7%) offers major opportunities as AI technology continues to grow around the world.
Looking ahead, I see two huge growth catalysts for Arista. First, the campus networking initiative expects to reach $750 million in revenue by 2025. Interestingly, Gartner recently recognized Arista as a Customer Choice in enterprise wired and wireless LAN infrastructure, validating its progress in this segment. Second, the AI back-end networking capability, which also targets $750 million in revenue by 2025, leverages the company’s leadership position in high-performance networking.
Furthermore, the company’s expectation of 15-17% growth maintains a pattern of conservative targets being consistently exceeded. At the same time, the slight expected decline in margins to 43-44% also reflects investments in R&D (11-12% of sales) used to maintain the technological edge.
Even ANET’s corporate management impresses me. CEO Jayshree Ullal has reduced emissions by 60% in five years. Furthermore, the composition of the company’s board of directors, which consists of 77% independent individuals and 50% gender and ethnic diversity, indicates progressive management, setting them apart from the Fortune 1000 companies with both a female CEO as a CFO.
While I’m bullish on ANET stock, there are still risks to consider. For starters, Cisco remains formidable with deep business relationships. In addition, supply chains require constant management and cloud provider expenses can be high. Nevertheless, operational metrics and consistent execution demonstrate Arista’s ability to overcome these challenges while maintaining industry-leading performance.
Furthermore, with a price-to-earnings (P/E) ratio of 48.8x, some potential investors might view Arista’s stock as quite expensive. However, I see a company aggressively expanding its addressable market with technology leadership and consistent execution that warrants a premium valuation. For me, the shift to 800G and the accelerated build-out of infrastructure should create the ideal conditions for growth.
As for Wall Street, analysts seem to agree with my bullish view and have a strong buy consensus rating on ANET stock based on 10 buys, three holds, and zero sells in the last three months, as indicated in the graph below. Furthermore, the average ANET price target of $439.25 per share implies 10% upside potential.
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For investors looking to capitalize on the AI infrastructure boom, I think Arista offers something rare: a company that not only rides the wave, but helps define its shape. The proven ability to establish and maintain relationships with the world’s most advanced technology customers, combined with tremendous untapped potential in the broader enterprise market, creates a unique growth proposition. At current valuations, I think the market appears to be undervaluing both its established strengths and its growing opportunities.
That’s why I’m strongly bullish on Arista Networks. The company is not only participating in the AI revolution, it is dominating it. For investors looking to capture the true value of AI infrastructure, I believe Arista offers a clear technology advantage, with the financial strength and operational excellence to fully leverage it. Despite the inevitable risks of an emerging market, I think Arista will be one to watch in the near future.
