Arista Networks (NYSE:ANET) posted better-than-expected third-quarter results on Monday despite worldwide supply chain constraints. Management also said it anticipates impressive revenue growth next year and a strong double-digit percentage compound annual growth rate through 2025. 

Following those positive announcements, the stock price jumped by nearly 26%, and it is now up by approximately 102% since the beginning of November 2020. So is it too late for investors to buy shares and get exposure to the cloud network specialist's rosy future?

Colleagues working together in a data center.

Image source: Getty Images.

More than cloud networking

Since its initial public offering in 2014, Arista has generated strong revenue growth thanks to its differentiated networking offering for cloud data centers. The company's products filled a gap left by established network vendors Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR), which failed to update their legacy offerings to address cloud titans' demand for scalable, flexible, and cost-efficient networking infrastructures.

Arista has grown its market share in the high-speed data center switching market from 7.8% in 2014 to 19.5% in the first half of 2021, according to the research outfit Crehan Research. And over the last few years, it expanded its footprint beyond its core cloud networking business via acquisitions and internal developments. For instance, it has developed a networking portfolio for campus (smaller enterprise) networks that seems to be gaining traction. During the earnings call, management asserted that the company's campus business should double this year to $200 million, and said it expects it will double again in 2022 to $400 million.

So the company delivered strong third-quarter results thanks to the strong broad performance of its portfolio. Revenue increased 23.7% year over year to $748.7 million, which exceeded the guidance range of $725 million to $745 million despite supply chain constraints. In contrast, Juniper said it posted quarterly revenue below the midpoint of its forecast range because of those same supply chain challenges.

Long-term growth

In the long run, Arista management expects this strong momentum to continue as the world will need more computing resources to support our rising use of online services. As an illustration, the company's second-largest customer, Meta Platforms, announced last week a significant increase in capital expenditure to expand its data centers and support its metaverse initiative. That bodes well for Arista as it has been developing networking solutions with the company formerly known as Facebook over the last several years. Arista will also profit from the strength of its largest customer, Microsoft, and its Azure cloud offering.

As a result, management indicated during the company's analyst day on Monday that it expects revenue to grow at a 15% compound annual rate over the next five years, and set an aspirational goal of generating annual revenue of $5 billion in 2025. That represents a deceleration from its anticipated 30% revenue growth next year, but its long-term outlook remains far superior to those of its competitors that still have to deal with legacy products.

Indeed, Cisco announced in September its goal of growing its top line at a more modest compound annual rate of 5% to 7% through 2025. And Juniper anticipates low-single-digit percentage revenue growth over the next couple of years. Those estimates suggest Arista will take market share away from its peers over the next several years.

What's more, with scale, Arista should sustain its high profitability with an anticipated non-GAAP (adjusted) operating margin of 37% by 2025, compared to 38% this year.

Demanding valuation

In response to those impressive results and upbeat long-term forecasts, traders bid Arista's stock upward by more than 25% to a new all-time high. The market now values the company at 10.6 times expected 2022 revenue and 7.8 times management's forecast 2025 revenue.

Those valuations suggest that the market is already pricing in flawless execution over the next several years. Granted, Arista has proven its ability to compete against much larger networking players in the past. But investors should consider investing in Arista's stock only if they expect the company to surpass its ambitious long-term goals. That's not a bet I'm willing to make given the intense competition in the networking area.

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.