In recent years, one U.S. technology company has emerged as a leader in high-performance networking solutions for data center and cloud applications. With revenue growing 15.9% to $1.69 billion in the second quarter of 2024 and gross margins reaching 64.9%, the company is proving that its innovative approach to software-defined networking and cloud services really works. The collaboration with NVIDIA, focusing on the integration of artificial intelligence into its products, strengthens its competitiveness and opens up new markets.

The company's history and growth are underpinned by strategic acquisitions and a strong focus on emerging markets where demand for cloud services is high. Its average earnings per share (EPS) growth is 34.1% and is expected to grow by another 18.9% this year, well ahead of the industry average.

Company performance

Arista Networks $ANET is an American technology company based in Menlo Park, California, founded in 2004 by former Cisco engineers. It specializes in developing and delivering high-performance networking solutions for data center and cloud applications. Its approach to software-defined networking (SDN) and cloud computing power has led Arista to rapid growth and market recognition.

In its early years, Arista Networks gained a reputation for an innovative product portfolio that included high-performance network switches optimized for cloud environments. These switches are known for their low latency and high throughput, making them ideal for large data centers and Internet companies. In addition to the hardware components, Arista has also developed the Arista EOS (Extensible Operating System) platform, which enables advanced network management and integration with other tools. This combination of hardware and software is key to providing comprehensive and efficient solutions that meet growing customer demands.

Arista Networks' geographic footprint includes clients worldwide, including major markets in the US, Europe and Asia. The company is actively targeting emerging markets where demand for cloud services and advanced network solutions is growing. This expansion is supported by strong revenue growth and profitability, making Arista an attractive choice for investors.

The company's history is also marked by several strategic acquisitions. For instance, in 2018, Arista acquired Metamako, a company that specializes in manufacturing networking equipment for the financial sector. This acquisition strengthened Arista's market position and expanded its product portfolio, enabling it to better meet the needs of its customers. As a result of these steps, Arista Networks not only remains competitive, but also maintains a high level of customer satisfaction, which is reflected in repeat orders and long-term contracts.

How was the last quarter?

Arista Networks, Inc. known as a leader in data-driven client-to-cloud networking, announced financial results for the second quarter ended June 30, 2024. This important milestone in celebrating the company's ten years on the stock market proved to be very successful, with CEO Jayshree Ullal thanking customers, employees and partners for their contributions to the company's success.

In the second quarter, Arista achieved revenues of $1.690 billion, an increase of 7.6% compared to the previous quarter and 15.9% compared to the same period in 2023. This positive development is supported by a strong performance in products and services, with product revenue of $1.423 billion and service revenue of $267 million.

GAAP gross margin was 64.9%, up from 63.7% in the first quarter of 2024 and 60.6% in the second quarter of 2023. Non-GAAP gross margin was even higher at 65.4%, again reflecting a positive trend compared to 64.2% in the first quarter of 2024 and 61.3% in the second quarter of 2023.

The company's second quarter GAAP net income was $665.4 million, or $2.08 per diluted share, compared to $491.9 million, or $1.55 per diluted share, in the same period last year. Non-GAAP net income rose to $672.6 million, or $2.10 per diluted share, compared to $501.2 million and $1.58 per diluted share in the second quarter of 2023. CFO Chantelle Breithaupt highlighted that the company achieved a 33% increase in earnings per share compared to the same period last year, driven by strong performance in sales and gross margins.

Highlights included the launch of next-generation Multi-Domain Segmentation for Zero Trust networking, which focuses on creating efficient microperimeters across campuses and data centres, reducing the risk of cyber-attacks. In addition, Arista announced a collaboration with NVIDIA to develop holistic AI solutions that integrate compute and network domains into one managed AI entity. The company also unveiled Etherlink AI platforms that are optimized for demanding AI tasks, enabling efficient management of AI clusters.

For the third quarter of 2024, Arista expects revenue between $1.72 billion and $1.75 billion and non-GAAP gross margin of approximately 63% to 64%. Management cautioned that the forecasts include certain uncertainties and risks, including economic and geopolitical conditions, as well as the rapid evolution of the networking market.

Results for recent years

Analyst views

Investors often look to analysts' recommendations when deciding whether to buy, sell or hold a stock.

Arista Networks currently has an average broker recommendation (ABR) of 1.67 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on actual recommendations (Buy, Hold, Sell, etc.) from 23 brokerage firms. An ABR of 1.67 falls between Strong Buy and Buy. Of the 23 recommendations that derive the actual ABR, 15 are Strong Buy and two are Buy. Strong Buy and Buy account for 65.2% and 8.7% of all recommendations, respectively.

3 reasons why Arista is attractive

Earnings growthA: Profit growth is undoubtedly a key factor that attracts investors' attention. Companies with strong earnings growth typically experience increased interest and strong share price gains. Arista Networks boasts a historical earnings per share (EPS) growth rate of 34.1%. However, for growth-oriented investors, it's important to look primarily at expected growth. The company's EPS is expected to grow 18.9% this year, well above the industry average of 16.9%. This positive outlook signals strong potential for further growth in Arista Networks stock.

Cash flow growthA: Cash is the lifeblood of any business, and cash flow growth is particularly important for growth-oriented companies like Arista Networks. High cash flow growth allows these companies to expand their operations without having to rely on expensive external financing. Currently, Arista Networks' year-over-year cash flow growth is 47.4%, well above the industry average, which shows a decline of 18.7%. The company's historical cash flow growth rate over the past 3-5 years was 27.1%, while the industry average was only -1%. These metrics clearly indicate that Arista is in a great position for further expansion and investment.

Promising revisions to earnings estimatesA: Another reason why investors find Arista Networks an attractive investment is the positive earnings estimate revisions. The trend in earnings estimate revisions has a strong correlation with stock price movements in the short term. In the case of Arista Networks, there has been an upward shift in estimates for the current year. The Zacks Consensus Estimate for the current year has risen 0.2% over the past month, indicating that analysts and investors have increased confidence in the company's future performance. This positive trend in estimate revisions adds to the attractiveness of Arista Networks stock and provides investors with reasons to be optimistic.

Growth potential

Arista Networks has been slightly overlooked since its initial public offering in June 2014. It wasn't until 2022 that Wall Street began to take notice, as artificial intelligence was a major topic of discussion. But the truth is that Arista goes much further than just AI. Its technology and infrastructure address a variety of different industries, including finance, healthcare, education, media, and entertainment. Arista products provide both scalability and reliability, which is essential in today's data-driven world.

In addition, its EOS (Extensible Operating System) and high-performance data center switches have made it a favorite among hyperscale cloud providers. With the cloud computing market expected to grow exponentially in the coming years, ANET stock is well positioned to take advantage of this demand.

In terms of fundamentals $ANET is one of the quality growth companies, which is a strong sign here as it outperforms the sector average in many respects (P/E, P/S, P/B). The share price has appreciated 71% since the beginning of the year alone and 754% over the past 5 years.

Fair price

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