Cloud networking specialist Arista Networks (ANET -0.82%) announced second-quarter earnings after the market closed Monday, and the results dazzled Wall Street. Despite supply chain disruptions and rising costs, revenue soared 49% to $1.1 billion and earnings rose 52% to $0.94 per diluted share. Those numbers beat analysts' consensus estimates on the top and bottom lines.
Arista also offered guidance that exceeded expectations. In the third quarter, the company expects revenue to grow 37% to $1 billion, while its non-GAAP (adjusted) operating margin remains flat at 39%, which is particularly impressive in light of the inflationary environment. That news sent shares up as much as 7% after hours.
After that impressive performance, is this growth stock a buy?
A novel approach to data center networking
Arista provides high-performance networking solutions for large data centers and enterprise campus environments. That includes switching and routing hardware, as well as adjacent software for network management, monitoring, and security. Arista's platforms feature industry-leading speed and capacity, and they lower the total cost of ownership compared to legacy systems.
Arista's key innovation is the Extensible Operating System (EOS). A single EOS image runs across every piece of its hardware, meaning every switching and routing platform is powered by the same software version. That distinguishes the company from Cisco Systems and other legacy vendors that rely on multiple operating systems with numerous software images, making network maintenance more complicated and costly.
In short, Arista empowers each customer to deploy and manage a seamless network across their IT infrastructure, from private data centers to public clouds. That value proposition has helped Arista win clients like Meta Platforms and Microsoft, and it has helped the company steadily take share from Cisco in data center switching. Last year, Arista's market share hit a new high of 19.4%, up from 3.5% in 2012. Meanwhile, Cisco saw its market share fall from 78.1% to 40.6% over the same time period.
The future looks even brighter
Cisco still leads the broad data center switching market, but Arista has more market share in the 100-, 200-, and 400-gigabit verticals. Put another way, Arista is the leader in the higher-speed subsections of the data center switching market. That bodes very well for the future.
In the coming years, the continued adoption of cloud computing, 5G networks, and data-intensive applications (e.g., artificial intelligence and streaming media) will create a need for faster data center networks. And Arista, as the gold standard in high-speed networking, is well positioned to address that need.
Also noteworthy, Arista recently acquired Pluribus Networks, which designed an automated cloud networking fabric -- a technology that unifies multiple cloud networks -- that is particularly well suited to two use cases: 5G networks and data processing unit-based (DPU) networks. That acquisition makes Arista a valuable partner to telecom companies, and it has already paved the way to partnerships with DPU market leader Nvidia and 5G networking equipment provider Ericsson.
In summary, Arista's networking solutions offer better performance and reduced operational complexity compared to legacy systems, and that edge translated into solid financial results in the second quarter. But Arista still has plenty of room to grow. Management puts its market opportunity at $35 billion by 2025.
So is the stock a buy? Shares currently trade at 11.9 times sales. That's slightly higher than the five-year average of 10.1 times sales, but still a reasonable price to pay given the long-term potential. With that in mind, I think it's worth buying a few shares of this growth stock now, though I'd split my capital into thirds to build a position through dollar-cost averaging.