Network platform company Arista Networks (ANET -0.08%) is the 15th best stock performer over the last 10 years, according to MacroTrends. To understand why, look no further than the company's otherworldly growth rate: It has averaged 29% quarterly revenue growth during the past decade, according to YCharts, meaning its revenue has grown by nearly 900%.
The past decade saw a mega-trend play out in investing: Computing and software increasingly moved to the cloud, and Arista Networks was a major beneficiary of the trend. Its two largest customers -- Microsoft and Meta Platforms -- have spent billions of dollars building out the necessary data centers, driving strong revenue growth for Arista.
Image source: Getty Images.
Between now and 2030, another mega-trend appears poised to play out in the investing world. Yet again, it seems that Arista Networks' ship will sail ahead on these strong tailwinds.
The AI trend isn't done yet
Artificial intelligence (AI) is having its moment in the limelight. Whether it's reading AI summaries for search results, turning family photos into Ghibli-style art, or having ChatGPT give ideas for starting conversations, regular people are interacting with AI applications more and more. Businesses are also increasingly finding ways to integrate AI automation into tasks, making their operations more efficient.
However, the increasing use of AI comes at a cost. In May, the aforementioned Ghibli-style art trend overwhelmed OpenAI's graphics processing units (GPUs). Simply put, they were overworked, pointing to an ongoing need to build out AI infrastructure.
According to McKinsey & Company, AI infrastructure spending could hit an astronomical $6.7 trillion by 2030. That number is up for debate. But less debatable is that the cloud computing giants have already committed to spending hundreds of billions of dollars in coming years to meet surging demand for AI.
AI data centers need network solutions, which is where Arista Networks comes in. Understanding the nuts and bolts of how this space works is admittedly difficult. But suffice it to say that Arista is considered to be a leader when it comes to cloud-based network solutions, and its revenue has consequently more than tripled over the last five years as demand surged.
ANET Operating Margin (TTM) data by YCharts.
As the chart above shows, strong demand has also lifted the operating margin for Arista Networks to an all-time high. This could be reason for concern for those looking to buy the stock today. After all, if the AI trend has already experienced its fastest growth rate, then one would expect Arista's own growth to slow and its profit margin to come back down to normal, potentially hurting the stock.
However, given the ongoing commitments to AI capital expenditures, I don't believe Arista Networks is about to be a victim in a cyclical downtrend. On the contrary, the cycle trend still seems to be up.
Can Arista Networks' top line double in five years?
For its part, Arista Networks estimates its market opportunity at over $70 billion. For comparison, management expects to generate $8.2 billion in revenue this year. That's a big number, yes. But it's still well below the size of the market opportunity, suggesting plenty of upside opportunity.
Should Arista Networks generate revenue of $8.2 billion in this coming year, it would represent 17% growth from 2024. That's a strong growth rate, but a step back from its 20% growth in 2024. And it's a significant drop from its five-year average of about 29% top-line growth.
Let's assume that Arista grows by 17% in 2025, and growth thereafter slows to about 14%. This would be about half of its average growth rate over the last five years. Given the company's leadership position in a large growing market and its long track record of taking market share, I believe these assumptions are conservative.
Under these assumptions, it's possible that Arista Networks' revenue could almost double by the end of 2030. Importantly, this level of growth could be enough to sustain its stellar profit margins.
Trading at 45 times its trailing earnings, Arista Networks stock isn't cheap right now. It would have room to fall if growth stumbled by a significant amount and margins took a step back.
However, given the strong trends in the space right now, I believe Arista's growth will likely stay strong. Should its growth rate reaccelerate within the next five years (as it's done multiple times in the past), then perhaps revenue could more than double in the next five years.
I believe Arista Networks stock looks pricey, but that's justified given its leadership position for an important growth trend. I expect its revenue to increase nicely and for its profit margins to stay strong, which means that its shareholders will likely enjoy many more years of positive stock returns.
