Enterprises are moving resources to the cloud, and it's easy to see why. Cloud computing makes it possible to access services like computing, storage, and networking through the internet. More importantly, those services can be accessed immediately, without any upfront investment in hardware. That allows enterprises to operate more efficiently and scale more quickly.
Not surprisingly, numerous tech companies are benefiting from this trend. But Arista Networks (ANET 0.40%) often flies under the radar. Here's why you should consider buying this stock.
Image source: Getty Images.
Arista's opportunity
Traditionally, enterprise applications were delivered from private data centers, and they were run on a small number of servers. In this scenario, most of the traffic was north-south, meaning data was primarily moving in and out of the data center. But the rise of cloud computing has changed that dynamic, creating a need for a more modern network architecture.
Today, many enterprise applications are delivered from cloud data centers, and they run across thousands of servers. As a result, most of the traffic is east-west, meaning data is primarily moving within the data center. Why is that? Because cloud providers create a virtualized pool of resources so that clients around the world can access various services. However, traditional networking solutions weren't built for that purpose.
That's why Arista pioneered software-driven cloud networking. Its platform is designed to boost performance and programmability from the data center to the enterprise campus, helping clients create and manage fast, flexible networks.
To add, Arista has also bolstered its portfolio through acquisitions. Most recently, the company acquired Mojo Networks, Big Switch Networks, and Awake Security, companies that specialize in campus WiFi, network monitoring, and network security, respectively. As a result, management puts Arista's market opportunity at $33 billion by 2025.
Image source: Getty Images.
Arista's advantage
Arista has a few key advantages: First, its extensible operating system (EOS) runs across its entire portfolio of switching and routing hardware. This differs from rivals like Cisco Systems, which deploys multiple different operating systems across its switches and routers, increasing IT cost and complexity.
To add, according to research firm Forrester, EOS is also more programmable than Cisco's various operating systems. As a result, Arista's platform is better suited to automation and customization via third-party applications, allowing clients to manage and monitor their networks more easily.
Finally, Arista exclusively works with third-party chipmakers. Again, this sets the company apart from Cisco, which builds a good portion of its semiconductors in-house. Notably, Arista's approach gives clients more flexibility, allowing them to choose which chips they want in their hardware. Moreover, Arista can immediately incorporate new chips into its products, giving clients access to the latest technologies, all without spending a dime on semiconductor research and development.
Ultimately, this means Arista's switching platforms offer better performance at the same price.
Arista's financial performance
Cisco has long dominated the data center switching market, but the company is slowly losing ground to Arista. In fact,, between 2012 and 2020, Cisco's market share fell from 78% to 43%, while Arista's rose from 4% to 16%.
Not surprisingly, Arista's top-line performance has been solid in recent years. More importantly, the company is a free cash flow-generating machine.
|
Metric |
Q1 2017 (TTM) |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$1.2 billion |
$2.5 billion |
19% |
|
Free cash flow |
$242.6 million |
$777.6 million |
34% |
Data source: Ycharts. TTM = trailing 12 months. CAGR = compound annual growth rate.
While Cisco still reigns in the data center switching market -- including ethernet switch speeds of 10 gigabits per second (Gbps) or faster -- Arista has actually established itself as the leader in the 100 Gbps and above segment.
That's a big deal. As cloud computing continues to gain traction in the coming years, networks will need to be even faster and more flexible. To that end, Arista's management expects a shift away from slower platforms, as enterprises upgrade to 200 Gbps switches (and faster) over the next five years. In other words, the industry is moving toward speeds where Arista is already dominant.
As that trend plays out, the company is well positioned to take more market share. And if Arista can maintain its strong financial performance, I wouldn't be surprised to see this cloud computing stock double by 2026.
