Palantir Technologies led the S&P 500 (^GSPC 0.16%) higher last year. Shares advanced 340% as the company reported increasingly strong demand for its artificial intelligence (AI) platform. Palantir is worth $163 billion as of Jan. 20, but certain Wall Street analyst expect Shopify (SHOP 2.64%) and Arista Networks (ANET +4.65%) to surpass that figure in 2025:
- Shopify is worth $134 billion. The stock must return at least 22% for its market value to top $163 billion in 2025. Anthony Chukumba at Loop Capital has set Shopify with a target price of $140 per share. That forecast implies 36% upside from its current share price of $103.
- Arista Networks is currently worth $150 billion. The stock must return at least 9% for its market value to top $163 billion in 2025. Mike Ng at Goldman Sachs has set Arista with a target price of $135 per share. That forecast implies 13% upside from its current share price of $120.
Here's what investors should know about Shopify and Arista Networks.
NASDAQ: SHOP
Key Data Points
1. Shopify
Shopify reported encouraging third-quarter financial results, beating estimates on the top and bottom lines. Revenue increased 26% to $2.1 billion on strong growth across subscription software and merchant services. Meanwhile, non-GAAP (generally accepted accounting principles) earnings increased 46% to $0.35 per diluted share. The company expects similar sales growth in the fourth quarter.
The investment thesis for Shopify centers on its unparalleled ability to simplify commerce across digital and physical channels. Specifically, its software lets merchants manage their businesses from a single dashboard, integrating sales from branded websites, social media, online marketplaces, and brick-and-mortar stores. The company also provides adjacent services for payments, marketing, and logistics, as well as tools for business-to-business (B2B) and cross-border commerce.
International Data Corporation (IDC) recently recognized Shopify as the market leader in e-commerce platforms for mid-market businesses (those with annual sales between $100 million and $1 billion). And Forrester Research has recognized its leadership in B2B e-commerce. That last point is important because the B2B commerce market (also called wholesale) is three times larger and growing nearly twice as fast as the retail e-commerce market.
Importantly, Anthony Chukumba at Loop Capital believes the market is underestimating how much Shopify will benefit from artificial intelligence (AI). Shopify Magic is a suite of AI tools that assist merchants in building storefronts, generating product images, and writing product descriptions. The company also uses AI internally to boost efficiency. "We believe Shopify will be able to grow its revenue at a much faster rate than its operating expenses for the foreseeable future," Chukumba wrote in a recent note.
Wall Street expects Shopify's adjusted earnings to grow at 25% annually through 2025. That makes the current valuation of 90 times adjusted earnings look expensive. But I think analysts are underestimating earnings. Shopify has exceeded the consensus estimate by an average of 22% in the last four quarters. If that pattern continues, its market value could eclipse $163 billion in 2025, while the valuation multiple declines slightly.
I think the target price of $140 per share set by Loop Capital is quite plausible. Investors should feel comfortable buying a small position in Shopify today.
NYSE: ANET
Key Data Points
2. Arista Networks
Arista reported solid financial results in the third quarter that beat estimates on the top and bottom lines. Revenue increased 20% to $1.8 billion, due in part to strong demand for AI networking solutions, and non-GAAP earnings increased 31% to $0.60 per diluted share. The company also gave guidance that beat the Wall Street consensus, such that revenue is projected to increase 22% in the fourth quarter and 16% in 2025.
The investment thesis for Arista is straightforward: The company dominates the market for high-speed Ethernet switches, the hardware that moves information through data centers. Specifically, Arista has 43% market share in Ethernet switches in the 100G, 200G, and 400G verticals, the three fastest switches widely deployed today. That is quadruple the share held by closest competitor Cisco.
Moreover, Arista is likely to maintain its leadership and even gain share due to its software-centric strategy. A single image of its Extensible Operating System (EOS) runs across all of its switching and routing products, which simplifies network maintenance compared to legacy vendors like Cisco that use multiple operating systems with numerous images.
Importantly, Bloomberg estimates that demand for high-speed networking solutions will increase fivefold by 2027 as enterprises build out their AI infrastructure. In other words, Arista is the dominant force in a market where spending is projected to increase very quickly, and the company also has a durable competitive advantage in EOS.
Wall Street expects Arista's adjusted earnings to increase at 12% annually through 2025, which makes the current valuation of 56 times adjusted earnings look expensive. However, Arista beat the consensus estimate by 14% on average in the last four quarters. Assuming that pattern continues, its market value can top $163 billion in 2025, while its valuation becomes less expensive.
I think the target price of $135 per share set by Goldman Sachs is reasonable. I am particularly confident because Arista has already provided guidance for 2025 that exceeds Wall Street's consensus estimate. Therefore, investors should consider buying a small position in this stock today.
