High-performance networking specialist Arista Networks (NYSE:ANET) reported third-quarter results on the evening of Monday, Oct. 2. The company beat Wall Street's estimates across the board and issued rosy guidance for the next quarter. Investors were quick to embrace the strong earnings report and Arista's stock opened Tuesday's trading more than 12% higher.

Arista Networks' third-quarter results by the numbers

Metric

Q3 2020

Q3 2019

Change

Analyst Consensus

Revenue

$605 million

$654 million

(8%)

$581 million

GAAP Net Income (loss)

$168 million

$209 million

(19%)

N/A

Adjusted Earnings (loss) per Diluted Share

$2.42

$2.69

(10%)

$2.21

Data source: Arista Networks. GAAP = generally accepted accounting principles.

Arista's European and Asian sales recovered from weak second-quarter performances as enterprise customers and so-called cloud titans invested in their data center and business campus networks again. Looking ahead to the fourth quarter, management expects top-line sales of approximately $625 million. That works out to a 13% year-over-year increase and leaves the $609 million Street consensus far behind.

Arista's management views 2020 as a "reset year" that allows the company to refocus on a different set of core products. CEO Jayshree Ullal sees a multi-year growth cycle starting in several different product categories, led by the cloud and data center products and router replacements. The changing product mix supports Arista's focus on scaling network designs up to cloud-grade performance and cloud-based network management tools.

"What is clear is Arista's cloud principles now apply to all sectors, and we are diversifying well across customers and verticals," Ullal said on the earnings call. "We believe Arista will emerge stronger, not only returning to double-digit growth in 2021 but also aiming for consistent growth in the years beyond."

A blue charting arrow bounces skyward off a black trampoline.

Image source: Getty Images.

Where is Arista going from here?

Investors can think of Arista Networks as a general play on the cloud computing market. Thirty-seven percent of Arista's third-quarter sales came from the cloud titans, which is the management team's name for blue-chip technology giants Microsoft, Alphabet, and Facebook as a group. That's a solid top-level customer base with deep pockets and a nearly unquenchable thirst for faster and more reliable networks. Beyond these important accounts, Arista is reaching deeper into the data centers of smaller enterprise-grade clients. The software-defined Cognitive Campus network model also appeals to smaller companies with smaller data centers, setting the stage for a long period of potential growth in customer accounts below the enterprise level.

The stock is trading at a lofty 27.6 times trailing earnings today, which may sound excessive in the light of the third quarter's negative year-over-year trends. But Arista is poised to make it through the COVID-19 crisis largely unscathed and get back to solid earnings growth for the foreseeable future. That's a winning investment in my book.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.