The advent of generative artificial intelligence (AI) has been a boon to a wide range of companies that facilitate the technology. Most AI processing takes place in the data center, driving robust growth for key players in the field.
One notable company among them is Arista Networks (ANET 3.10%). The company pioneered a revolutionary switch designed to connect servers and other high-speed devices to networks. What sets this innovative product apart is that it provides high-speed data transfer with low latency (or very little lag), and the impact on the company's results has been undeniable. The stock has gained 50% over the past year (as of this writing) and has surged 243% since the dawn of AI in late 2022.
The company faces a key hurdle with investors when Arista reports its second-quarter results after market close on Aug. 5. Given the stock's gains over the past few years, should investors buy Arista Networks stock ahead of this crucial financial report, or wait until after the results hit the wires?
Let's see what lessons we can learn from history.
Image source: Getty Images.
Positioned for the AI boom
When it comes to high-performing network solutions, Arista Networks is in a class by itself. The company's focus on data centers and cloud environments has put it at the intersection of the AI revolution. Arista's growing collection of switches, routers, and other networking hardware facilitates the flow of data across servers, data centers, and networks.
Moving data across the ether is big business thanks to the accelerating adoption of AI. The company moved quickly to capitalize on the opportunity, developing scaled-up Ethernet offerings, designed to accelerate networking for large-scale AI models. Last year, the company introduced the Arista Etherlink AI platforms, "designed to deliver optimal network performance for the most demanding AI workloads, including training and inferencing," according to the company.
The most ambitious of these is the Distributed Etherlink 7700 AI networking platform, which can connect up to 10,000 graphics processing unit (GPU) clusters -- the chips that have become a cornerstone of AI processing. Arista's gear helps optimize AI application performance, which in turn lowers cost and improves reliability.
The company boasts a host of industry accolades that attest to the critical nature of its offerings. Arista was selected as a Visionary in Gartner's esteemed Magic Quadrant. The company was cited for providing the network management tools that simplify operations, offering a differentiated network security strategy, and providing advanced AI and machine learning capabilities. Arista was also previously recognized as a Customer's Choice in Gartner's Peer Insights survey.
Data center operators are scrambling to upgrade their facilities to meet the rigorous demands of AI, and many are choosing products from Arista Networks, which is favorably impacting the company's financial results.
In the first quarter, Arista generated revenue of $2 billion, up 28% year over year and 4% sequentially. This resulted in earnings per share (EPS) that jumped 30% to $0.65. The results sailed past both management's guidance and Wall Street's expectations.
In the wake of these robust results, management issued a bullish forecast. For the second quarter, Arista is guiding for year-over-year revenue growth of 24% to $2.1 billion.
Should you buy before Aug. 5?
The chart illustrates Arista's stock price movements over the past three years. The blue circles with the letter "E" at the center show when the company released its quarterly financial reports.
In the majority of these instances, or roughly 66% of the time, Arista stock rallied immediately following an earnings report. The catalyst behind many of these moves was better-than-expected financial results and a positive outlook. This would seem to suggest that Arista Networks is poised to continue its winning ways.
Investor sentiment tends to influence stock price moves, and there's simply no way to know for sure how shareholders will react to a company's results on any given day. That's why I tend to avoid date-driven stock buying as a general rule.
Wall Street is bullish on Arista Networks
Wall Street is famous (or infamous) for the diversity of its opinions. That's why it's noteworthy that the majority of analysts who cover Arista Networks believe the stock has room to run. Of the 29 analysts who offered an opinion (thus far) in July, 76% maintain a buy or strong buy rating on the stock, and only one recommends selling.
J.P. Morgan analyst Samik Chatterjee is the biggest bull among his Wall Street colleagues, maintaining an outperform (buy) rating and recently increasing his price target to a Street-high $130. This suggests potential gains for investors of 11% compared to Monday's closing price. The analyst noted Arista's strong results and increased guidance, and expects "robust" cloud spending in the second half of the year.
One potential stumbling block (and the logic behind the aforementioned single "sell" rec) is the stock's frothy valuation. Arista Networks is currently selling for 50 times earnings, which is clearly pricey. Even its price/earnings-to-growth (PEG) ratio, which factors in its accelerating growth, comes in at 1.6, when any number less than 1 suggests an undervalued stock. So, it obviously trades at a premium.
However, it helps to use the stock's long-term results as context. Arista Networks has outperformed the broader market by a wide margin over the past five years, generating gains of 690%, seven times the returns of the S&P 500 (^GSPC -0.12%).
When viewed from that perspective, I'd argue Arista Networks is a buy, particularly for investors planning to hold for the long term. Whether you buy before Aug. 5 is merely a personal decision.
