Until recently, a lot of people had probably never even heard of Arista Networks (ANET 1.04%). Now, it's one of the hottest tickers on the market. The network company had significant success in its business of routers, network switches, and similar types of hardware devices, and Wall Street is taking notice. The stock has beaten the S&P 500 handsomely over the last 12 months, and the story seems primed to keep going.
There are a lot of tech stocks out there, and a ton of them have seen big gains in the short term. What I like about Arista is the fact that networking and cloud computing are integral to modern technologies. This is an industry that isn't going away.
Useful for the modern world
Arista Networks is involved in developing networks for large enterprises through the use of cloud computing, routers, data centers, and other digital resources. Networks are the backbone of infrastructure for many companies, and the increasing use of cloud computing bodes well for Arista's future.
In particular, Arista boasts the merits of its Extensible Operating System. As the company notes, it is the "core of Arista cloud networking solutions for next generation data centers and cloud networks." The company has a great position in cloud, and continues to innovate to stay ahead of the pack.
The company's success is highlighted by its collaborations with companies like Meta Platforms. Meta is using Arista's Distributed Etherlink Switch for AI clusters, and marks a continuation of collaboration that dates back to 2018. This is just one example of the company's merit and usefulness to major companies. in all, Arista currently has over 10,000 cloud customers worldwide.
The stock delivered returns of nearly 100% over the last year compared to an S&P 500 return of around 27%. More broadly, Arista gained 817% over the last five years and is perfectly positioned within the industry.
That usefulness is leading to a pretty great financial performance
Arista Networks has had three great years in a row, creating consecutive revenue growth rates of 27% in 2021, 48.6% in 2022, and 33.7% in 2023. Congruently, earnings have had significant growth rates as well. In fiscal 2021, diluted earnings per share increased by 31.94%, 60.86% in 2022, and 54.01% in 2023. Revenues in 2024 were up 17.43% through the first three quarters, with diluted earnings per share up 37.6% to $6.41 per share.
One of the things I really like about Arista is that it's a stock that can be looked at in terms of net income. So many tech stocks trade at high multiples to earnings or don't have earnings at all. But Arista Networks has developed to the point of creating meaningful earnings for shareholders. The company finished the first nine months of the year with net income of $2.05 billion. That's roughly a 39% increase from the first nine months of the year prior.
Looking ahead and valuation
I don't think the party's over. Networks don't go out of style in the business world, and the segment is evolving. Routers, switches, and other types of hardware are all in Arista's wheelhouse, and cloud-based networking is an ever-expanding business. Arista seems primed to continue benefiting from it.
Fourth-quarter guidance is calling for revenues of between $1.85 billion and $1.90 billion, with non-GAAP gross margins of 63% to 64%. On the low end, that would give Arista Networks full-year revenues of $6.92 billion and full-year revenue growth of 36.49% compared to 2023 results of $5.07 billion.
Analyst estimates are calling for full-year earnings of $1.87 per share, giving the stock a forward price-to-earnings (P/E) ratio of roughly 64 times earnings. Given the growth being demonstrated here and the fact that the company has a trend of earnings surprises to the upside, I think it's a reasonable valuation when you consider some of the valuations other tech stocks are garnering. As Danny Vena points out, the company's announced stock split is further evidence of success, as the stock has run so high over the last year.
All things considered, I view Arista Networks as a strong buy in 2025.
