Arista's Sales of AI Data Center Networks Were Good. Investors Wanted More. -- Barrons.com

By Bill Alpert

To keep up with their fast Nvidia chips, artificial-intelligence data centers need fast networks. That has driven demand for Arista Networks switches, and lifted the company's stock to a price-earnings multiple above 45 times the year's earnings forecast.

Apparently the growth that Arista reported Thursday night wasn't as strong as its stock's steep multiple demanded. In Friday trading, the shares are off 7%, to $400.

Arista's September quarter sales and profit nevertheless beat the consensus forecast. The stock is up about 75% for the year, and will split 4-for-1 on Dec. 3.

Friday's selloff probably reacted to the company's guidance for its 2025 year. Arista projected sales growth next year of about 16%. Buy-side investors were expecting the company to guide 18% to 20% growth, writes UBS analyst David Vogt in a Friday note, while the stock's steep multiple implies a 25% growth rate.

But September results were a solid beat. Revenue rose 20% to $1.8 billion. The sell-side consensus had only expected 15% growth. Cash operating profit (which excludes noncash charges) was $890 million, also well above forecasts. Net profit (again, excluding the noncash charges) grew more than 30% to $2.40 a share. The average Wall Street forecast was for $2.06 a share.

There was also solid growth in Arista's billings and deferred revenue -- which measure the company's sales backlog. Arista leads rivals Cisco Systems and Juniper Networks in sales of high-performance Ethernet switches. The speed and bandwidth of networks in AI data centers are increasing, to keep pace with the AI accelerators from Nvidia and Advanced Micro Devices.

The switch maker's main rival in AI networks now is Nvidia. But Arista is in solid with a number of the titans building hyperscale AI centers -- including Meta Platforms and Microsoft. Other AI center builders are sampling Arista's wares.

Arista's technical leadership in Ethernet AI persuades William Blair analyst Sebastien Naji to maintain a Buy rating, despite the stock's high multiple and 2025 guidance that was only in-line with expectations.

UBS analyst Vogt is keeping his rating at a Hold, however. While he expects AI data center giant to continue growing their spending, he says the rate of that growth will start to slow after 2025. Arista's non-AI switch sales could slow.

The price-to-earnings, or PE, multiple on Arista stock is nearly double that of the S&P 500 and seems to anticipate continuing high growth at Arista for many years. So the UBS analyst concludes that the stock has priced-in Arista's AI networking opportunity.

"We would expect Arista's PE multiple to compress over the next two years, as the strongest growth rates in the AI-driven cycle are likely to be 2025 and 2026," Vogt writes.

Write to Bill Alpert at william.alpert@barrons.com

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November 08, 2024 15:52 ET (20:52 GMT)

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