Following several challenging quarters last year because of the volatile spending of a few giant customers, Arista Networks (ANET -0.80%) posted strong fourth-quarter results last week. In addition, management expects double-digit revenue growth in 2021, as the company is diversifying its core cloud networking business. Yet despite that encouraging outlook, the stock price barely moved following the news. So should investors take this opportunity to invest in the cloud networking specialist?

Disruptive cloud networking

Over the last decade, Arista Networks has disrupted the traditional networking industry with innovative solutions for cloud providers. In contrast with Cisco Systems' legacy monolithic networking equipment, it disaggregated software and hardware to offer large customers more flexibility to build network infrastructures that better corresponded to their scale, performance, and cost requirements.

A blue cloud in front of rows of computer servers.

Image source: Getty Images.

As a result, Arista gained significant market share in the high-speed data center switching market, from 7.8% in 2014 to 16.3% during the first half of last year.

In particular, the company generated significant business with some large cloud customers, such as Facebook and Microsoft. As an illustration, Microsoft represented 23% and 22% of revenue in 2019 and 2020, respectively. That means Arista's results will remain correlated with Microsoft's high-growth cloud platform Azure beyond the short term.


However, the timing of spending of a few such large customers led to volatile and disappointing quarterly results last year. For instance, year-over-year revenue dropped during the first three quarters of 2020, partly because Facebook managed to reduce its networking investments during that timeframe.

ANET Revenue (Quarterly YoY Growth) Chart

ANET Revenue (Quarterly YoY Growth) data by YCharts

So Arista has acquired several companies over the last few years to reduce its dependency on large cloud customers and expand its business in the enterprise and campus (local area networks) areas by integrating extra capabilities, such as Wi-Fi and cybersecurity.

And the fourth-quarter results revealed that strategy has led to encouraging developments. Revenue increased 17.4% year over year to $648.5 million, well above the guidance range of $615 million to $635 million, driven by strong performance in enterprises and campus. Also, the total number of customers exceeded 7,200 at the end of last year, up from more than 6,000 one year before, which shows diversification is materializing.

Looking forward, management estimated the company's addressable market will grow from $23 billion in 2021 to $33 million in 2025. Considering Arista's spectacular execution over the last many years in disrupting the cloud networking area, the company is likely to show strong results by leveraging its innovative solutions to address those adjacent networking segments.

A little too pricey

So management forecasted strong double-digit revenue growth in the range of 14% to 15% in 2021. You should keep in mind revenue dropped by 3.9% to $2.3 billion in 2020, though, which provides an easy base comparison. But given the company's initiatives in expanding its market by leveraging its innovative portfolio, I expect revenue growth to continue beyond 2021.

Unfortunately, the market is already pricing in strong execution going forward, as the stock is trading at elevated forward enterprise value-to-sales and price-to-earnings ratios of 7.8 and 30.9, respectively.

Thus, while investors looking for exposure to the tech industry should keep Arista on their watch lists, the tech stock seems a bit too pricey at the moment.