An investment in Arista Networks (ANET 0.64%) over the last year has been a money-losing proposition, as the data center networking hardware and software company has been affected by slowing growth as its largest customers cut back on purchases.

In November, the company warned investors of declining revenues for the fourth quarter of 2019, but came in slightly better than its projection.  

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Even with this year's drama, the stock has been a big winner for investors who got in early. Let's take a quick look at the company's history, the numbers behind an IPO buy, and what investors can expect going forward.

A short history of Arista Networks

Arista was founded in 2004, with the idea that as cloud-based applications became more prevalent, data centers would need to move information more reliably and faster by orders of magnitude. Historically, hardware determined how traffic flowed through the data center, but Arista's founders believed that this network traffic should be directed with software. In 2008, the company shipped its first network hardware switching product along with its highly configurable software operating system.

The combination software and hardware solution for data centers caught on, and the company grew quickly, taking share from the networking giant Cisco.

Combination bar and line graph. Bars represent annual revenues from 2013 to 2019, starting at $361 million and climbing to $2,411 million. The line graph is the year-over-year revenue growth starting at above 61.7% and dropping over the years to 12.1% for 2019.

Data source: Arista SEC filings. Chart by author.

By 2013, the company achieved $361 million in annual revenues, and went public the following year. Since then, the company has grown annual revenues to $2.4 billion, a 37% compound annual growth rate over the last six years. This incredible growth has translated into market-beating gains for shareholders.  

The numbers for lucky IPO shareholders

It's not often that individual investors get to purchase shares at the IPO price, but let's run the numbers as if you were lucky enough to get in on the initial public offering (IPO).

Arista went public on June 6, 2014 at a price of $43. Without dividends or stock splits, the math for IPO gains is pretty simple. Buying 11 IPO shares for a total of $473 would be worth around $2,453 today. Even with the stock losing 15% in the past twelve months, this 5-bagger returned shareholders an average annual return of 33.6%.

10 laptops in a circle connected to a cloud on a background of an image of computer data.

Image source: Getty images.

But let's say you weren't one of the lucky ones, and even worse, you bought at the 2014 peak around $93. You would have only been able to buy five shares with your $500, but you still would have more than doubled your money and achieved market-beating annual returns of 17.6%. 

No matter when you bought into the stock, the future is what shareholders are are interested in today.

Major upgrades ahead

Arista has been preparing for an upgrade in data center network standard bandwidth speeds. Today, the most advanced centers operate on a 100-gigabit standard, meaning the fastest data can travel through the center is at 100 gigabits per second.

That's really fast, but as technology marches on with ultra-high definition streaming services, graphics-intensive massive multiplayer online games (MMOGs) and 5G mobile devices are creating even more demand on these critical network nodes. Data centers are starting to move to a 400G standard, and the company is prepared with a full suite of products for its customers.

Stacked area graphing market potential by speed from 2019 to 2024. 100GB is the biggest opportunity in 2019 and decreases slightly by 2024, but is still large. 400GB is negligable in 2019, but grows to the be the biggest opportunity by 2024. The total opportunity starts at less than $15 billion annually and grows to almost $20 billion by 2024.

Image source: Arista Networks Q4-2019 investor presentation.

Between these technology upgrades and opportunities in adjacent markets, the company's total addressable market will be $30 billion by 2024, giving it plenty of room for growth.

But capitalizing on this opportunity will take time. For 2020, management expects a "meaningful decline in cloud revenue," which will be the first time in its history that annual revenue will drop year-over-year.

While 400-gigabit pilots are starting this year, management indicates the impact of 400Gbps sales won't be material until 2021. But as you can see from the graph above, once the transition starts, the opportunity will be significant. In the meantime, shareholders will just have to be patient.