What happened
Shares of cloud-networking company Arista Networks (ANET 1.43%) got a boost on Thursday after notching an analyst upgrade. J.P. Morgan analyst Samik Chatterjee sees upside for the business heading into next year and raised the target price for the stock accordingly. The stock was up 5% as of 11:00 a.m. EDT today. But according to Chatterjee, it can rise much higher than that.
So what
Arista Networks was once a hot growth story as it focused its business to meet the new and growing need of cloud computing. But revenue growth has stalled lately. For example, in the second quarter of 2020, revenue was down 11% year over year. As a result, Arista stock trades at the same price today as it did in late 2017.
But Chatterjee thinks Arista Networks business will improve next year, thanks to an upgrade cycle. Cloud companies need to update their infrastructure periodically, and now they'll look to upgrade to 400G technology as opposed to the current 100G technology standard. As Arista Networks' customers upgrade or deploy for the first time, it may at last allow the company to return to double-digit revenue growth, which could help the stock finally climb higher.
Chatterjee's old price target for Arista Networks stock was $255 per share. Now, it's been raised to $275 per share, an 8% raise implying 24% upside from where it trades right now.
Image source: Getty Images.
Now what
Chatterjee's upgrade is bullish, but it's not groundbreaking news. Arista Networks management has long talked about 400G as a catalyst for its business. In fact, as of Q2, the company had 50 customers in 400G trials or in the early stages of deployment. In short, it's true there's an upgrade cycle coming.
That said, Arista Networks management has also said the COVID-19 pandemic makes a precise outlook difficult. Some customers appear to be delaying their upgrades as they try to predict their own business trends in these turbulent times. So the timing of the upgrade cycle isn't etched in stone for this technology stock.
