Shares of Arista Networks (ANET +4.20%) charged sharply higher in April, gaining 40.7%, according to data supplied by S&P Global Market Intelligence.
While the broader market recovery certainly helped to lift the stock, it was positive investor sentiment and the company's recently unveiled artificial intelligence (AI) product line that sent the network specialist to a new all-time high.
Image source: The Motley Fool.
A tidal wave of improving sentiment
Arista Networks provides a suite of Ethernet switches, routers, and other networking hardware that enables data to flow across servers, data centers, and networks. Since the vast majority of AI processing resides in data centers, the company has benefited from the accelerating adoption of these advanced algorithms. Investors have been moving downstream, looking for the next generation of AI winners, and have taken note of Arista Networks in a big way.
To kick off the month, Rosenblatt analyst Mike Genovese upgraded Arista Networks to a buy rating, raising his price target to $180. The analyst cited Arista's recently announced eXtra-dense Pluggable Optics (XPO) strategy and the company's close relationships with Microsoft and Meta Platforms, who he believes will be early adopters of the technology.
Arista helped spearhead the development of XPO high-density, liquid-cooled, pluggable optics to serve the needs of high-throughput AI data centers. These next-generation optics preserve the convenience of traditional plug-in optics -- enabling quick replacement with limited downtime -- while delivering 8 times the bandwidth of previous versions and reducing the number of servers needed by 75%.
Moreover, Arista previously hinted at a large new customer this year, and Wall Street suspects it's Alphabet's Google. If so, it could provide significant upside to Arista's forecast.
JPMorgan analyst Samik Chatterjee maintained his overweight (buy) rating on the stock while raising his price target to $200. The analyst expects that AI infrastructure investment will drive additional revenue for Arista.
Evercore ISI analyst Amit Daryanani jumped on the bandwagon, reaffirming his outperform (buy) rating and $200 price target, while also adding Arista to his "tactical outperform" list. The analyst cited accelerating AI investment and the company's strong industry position to justify his bullish stance.
In a blog post just days later, Google introduced its Virgo Network, the company's "scale out AI data center fabric." Fabric refers to the high-speed connections -- access points, routers, and switches -- that link servers together in a network. After reviewing the specs, Daryanani concluded that it's "an incremental positive" for Arista Networks, as Virgo's next-generation setup closely matches the technical specifications of Arista's recently introduced data center hardware. This is additional evidence that Google may well be the new "big" customer.
NYSE: ANET
Key Data Points
Is the stock a buy?
Arista has since reported its first-quarter results, which were robust by any stretch of the imagination. Revenue of $2.7 billion climbed 35% year over year, while adjusted earnings per share of $0.87 rose 32%. Arista also expects its AI-related sales to more than double to $3.25 billion over the next year. Despite its beat-and-raise quarter, the stock fell on the results.
Taking a step back provides context, as the stock is still up 56% over the past year. After a run of that magnitude, Arista had a high bar to clear. Even after its recent haircut, the stock is selling for 32 times next year's expected sales. While the stock might seem pricey, Arista's track record shows why it's deserving of a premium.
Don't take my word for it. Arista still has Wall Street's backing, as 93% of the analysts who cover the stock rate it a buy or strong buy, and none recommend selling. Furthermore, the average price target of $187 implies potential upside of 32% compared to Thursday's closing price.
Given the company's crucial role in the industry, its history of innovation, and the recent price weakness, I believe Arista Networks is an unqualified buy.
