When one or two customers contribute a lot of revenue to a single business, it can be problematic. The supplier must maintain great relationships and maybe even give some concessions to these large clients; otherwise, the business might suffer.
This is what happened just last week with Meta Platforms (META +1.33%) and Arista Networks (ANET 13.59%). Meta, formerly Arista's biggest customer, pulled back on its spending in 2024. This news caused investors to sell the stock off hard, and it now sits around 25% below its all-time highs. That's a massive reaction, but is it overblown?
Meta Platforms accounts for a large amount of Arista's total revenue
Arista Networks supplies its clients with data center networking solutions. Basically, any company that needs to send information from one data center to another is a potential client of Arista. While there are many businesses with data centers scattered across the globe, there are few that can match the scale of the various tech giants. As a result, it shouldn't surprise investors that a large chunk of revenue comes from a small client base. This is no different than GPU maker Nvidia (NVDA +5.93%), as it has multiple companies that each make up over 10% of its total revenue.
NYSE: ANET
Key Data Points
However, the problem with Arista is that Meta cut its spending with Arista last year. For 2024, Meta made up 14.6% of Arista's total revenue, indicating that Meta spent around $1.02 billion with Arista. However, in 2023, Meta made up 21% of Arista's revenue, accounting for $1.23 billion. But does that mean investors should panic?
I don't think so.
Management pointed to one key trend that Meta enacted during 2024: The Year of Efficiency. Meta pulled back its capital expenditure spending throughout 2024, although it recently accelerated in Q4.
META Capital Expenditures (TTM) data by YCharts
Arista's management claims that it was a victim of Meta's Year of Efficiency, but it expects the company's sales with Meta to rebound this year. Meta states that they will have capital expenditures between $60 billion and $65 billion in 2025, which will mostly be spent on AI infrastructure. Arista will be a direct beneficiary of this spending, so there is good news on the horizon.
Arista expects 17% revenue growth for 2025, which isn't far from the 19.5% growth it posted in 2024. So, the market's knee-jerk reaction probably wasn't fully correct.
As a result, this opens up a buying opportunity for investors.
Even after the sell-off, Arista's stock isn't cheap
Arista Networks isn't the cheapest stock around, as it trades for about 37 times forward earnings, a level last reached in September 2024.
ANET PE Ratio (Forward) data by YCharts
Still, 37 times forward earnings is fairly expensive when you compare it to other tech stocks that are growing at similar rates. Nvidia operates in a fairly similar market and is projected to report Q4 revenue growth of 73%. However, its stock trades for 30 times forward earnings. Still, Arista's products are top-of-the-line, and its clients are committed to working with them for the future.
So, if investors want to take a small position in the stock to take advantage of the sell-off, I don't think that's a bad idea. However, it may be wise to build a position in small pieces, as the price could continue to decline until investors get some good news from Arista.
