According to Cisco Systems (NASDAQ:CSCO), global network traffic is poised to grow 26% annually by 2022. Beyond their short-term challenges, both highly profitable network vendors Cisco and Arista Networks (NYSE:ANET) should benefit from this tailwind. But should investors prefer Cisco's dominant position over Arista's stronger revenue growth? Let's take a closer look and see which is the better buy.

Cisco: the historical dominant network vendor

Cisco, founded in 1984, initially sold routers, which are devices that forward network traffic between networks. It then expanded its portfolio with switches -- network devices that connect computers and servers into the same physical network -- following its acquisition of Crescendo in 1993. And after many other acquisitions, Cisco now offers computer-based solutions that span over a large spectrum of networking areas, including security and communications.

As a result, Cisco became a dominating network vendor. Synergy Research Group estimates Cisco's revenue from its routers and switches represented 51% of the market during the last quarter of 2018.

The company's revenue increased from $46.1 billion in fiscal 2012 to $52.0 billion over the last 12 months. It also generated a solid operating margin of 27.8%, thanks to its research and development and sales and marketing costs that are spread over its large revenue base.

However, Cisco struggled to adapt its legacy portfolio to the disruptive cloud computing technology. In contrast with Cisco's proprietary and monolithic solutions, cloud titans such as Amazon with Amazon Web Services and Microsoft with Azure utilize flexible, cost-efficient, and high-speed solutions to run and grow their huge data centers. Therefore, Cisco's share in the high-speed data center switching market dropped from 78.1% in 2018 to 46.6% during the first half of 2019, according to Crehan Research.

But Cisco made a U-turn to address its challenges in the cloud network data center area. Last month, it announced a new network operating system (IOS XR7) and a silicon architecture (Silicon One) that cloud titans and third parties can use to build their own network devices.

Thus, despite its expected next-quarter revenue decline in a range of 3% to 5% because of a weak macro-economic environment, according to management, Cisco should profit from the increase in global networking traffic over the long term.

Cloud on blur computer data center background.

Image source: Getty Images.

Arista: the fast-growing challenger

Arista filled the gap Cisco left with its lack of suitable networking solutions for cloud titans. As a result, Arista grew its revenue from $193.4 million in 2012 to $2.45 billion over the last 12 months. And during the last quarter, its revenue increased by 16.2% compared to last year.

Logically, its share in the high-speed data center switching market increased from 3.5% in 2012 to 18.8% during the first half of 2019. As the company serves huge cloud providers, which demands fewer sales and marketing efforts compared to acquiring many small customers, its sales and marketing expenses dropped below 10% of revenue since the second half of 2017. In contrast, many growth tech companies spend about half of their revenue as sales and marketing expenses.

Thus, Arista's operating margin of 33.7% over the last 12 months remains impressive in the context of its high revenue growth.

But Arista also has its challenges. With its concentrated huge customers (Microsoft and Facebook should each represent more than 10% of Arista's revenue in 2019), the company is exposed to the volatility of their expenses. For instance, during the last quarter, Arista communicated disastrous guidance that forecasts its next-quarter revenue to decline by 8% year over year. Management justified this disappointing outlook because of the shift in the procurement strategy of one single customer.

Beyond this short-term difficulty, Arista's dependence on a few customers should diminish. The company started expanding its portfolio in 2018 with its entry into the campus market (smaller corporate networks), but this decision will also intensify the competition with other network vendors such as Cisco and Juniper Networks.

Cisco is a better buy for prudent investors

Besides their short-term challenges, both tech stocks should profit from the increase in global traffic over the next several years. Thanks to its smaller scale and its greater exposure to the cloud network data center market, Arista should keep on growing at a faster pace than Cisco.

Arista's higher price-to-sales ratio of 6.5 and forward P/E ratio of 22.9 compared to Cisco's respective ratios of 3.86 and 13.98 reflect this expectation.

But given Cisco's solid dominant position and its capacity to adapt -- with some delay -- to cloud computing, its modest valuation seems a better choice for prudent investors. Arista's potential remains important, but the company depends on solid execution to keep on delivering strong growth over the long term and justify its higher valuation.