Arista Networks Advances the Era of AI and Microperimeters

Key Points

• Arista Networks is a cloud networking provider offering hardware and software networking solutions to data centers and enterprises.
• Arista Networks collects nearly half its revenues from major AI integrators, Microsoft and Meta Platforms.
• Arista Networks beat Q1 EPS by 25 cents and raised its fiscal full-year 2024 revenues an additional 2% to 12% to 14%.

Arista Networks Inc. NYSE: ANET is a leading networking company that provides hardware and software-defined networking solutions to data centers and enterprises. Arista has benefited from enterprise spending on artificial intelligence (AI) infrastructure. It's one of a few networking companies thriving in the current environment and consistently hitting all-time highs.

The same can't be said for its competitors in the computer and technology sector, including networking giants like Cisco Systems Inc. NASDAQ: CSCO, Hewlett Packard Enterprises Co. NYSE: HPE, which acquired Juniper Networks Inc. NYSE: JNPR and cloud networking leader Extreme Networks Inc. NASDAQ: EXTR, which is attempting to recover from inventory normalization.

Microsegmentation and Microperimeters

Arista is an early adopter of microsegmentation in data center environments to enhance security and network performance. Rather than a single keycard able to access a whole office building, microsegmentation divides a company's network, like an office building, into smaller zones where each office needs a special unique keycard to access.

This magnifies network security exponentially and also keeps security instances contained from spreading. Microperimeters go further to isolate zones within each office to identify and enable only certain authorized devices or participants to access and communicate. They migrate firewall functions into the network.

Microsegmentation and microperimeters are integrated into Arista's Extensible Operating System (EOS). Arista's network operating system powers its routing and switching platform. As a result, a company network is like a high-security office building that requires unique keycards to access different offices only for authorized individuals with permissions for specific zones.

Weekly Bull Flag Breakout

ANET triggered a weekly bull flag breakout pattern. The bull flag formed after peaking around the $307.13 Fibonacci (fib) level on March 25, 2024. ANET fell on lower highs and lower lows to form a flag that triggered the breakout through the upper descending trendline at $278.24. The weekly relative strength index (RSI) bounced back up to the 65-band. Pullback support levels are at $307.13, $289.33, $271.70, and $256.22.

Robust Start to the Year

Arista posted Q1 2024 EPS of $1.99, beating consensus analyst estimates by 25 cents, up 39% YoY. Revenues ramped up 16.3% YoY to $1.57 billion, beating the $1.55 billion consensus estimates. The company had completed $2 billion in stock buybacks. On May 3, 2024, the Board of Directors authorized another $1.2 billion stock buyback program. Arista raised its full-year 2024 sales growth outlook to 12% to 14%, up 2% from previous forecasts.

Raising Guidance and Confidence

Arista provided Q2 2024 revenue forecasts of $1.62 billion to $1.65 billion versus $1.62 billion consensus estimates. The non-GAAP gross margin is expected to be around 64%, and the non-GAAP operating margin is expected to be around 44%. Arista does not raise its full-year guidance on its first earnings report of the year unless it is sure of robust growth ahead. This full-year sales raise was a solid sign of management's selection for a strong 2024 powered by AI infrastructure spending from hyperscalers and massive social media companies.

AI Infrastructure Tailwinds

AI platforms need solid critical infrastructure. Networking is at the core, as there can be no latency issues, slowdowns or security breaches. Arista is benefitting from the early stages of this tailwind, which the company expects to continue in the next decade. The company raised its AI revenue target to $750 million in fiscal 2025. Nearly half of Arista Network's revenues are derived from major AI integrators Microsoft Co. NASDAQ: MSFT and Meta Platforms Inc. NASDAQ: META.

Arista Networks Chief Technology Officer (CTO) Ken Duda summarized, "Recent developments in AI have proved the value of data, but to take advantage of these breakthroughs, you need to gather and store large data sets labeled suitably for machine learning. Arista is solving this problem with NetDL. We continually monitor every device, not simply taking snapshots, but rather streaming every networking event, every counter, every piece of data in real-time, archiving a full history in NetDL."

Arista Networks analyst ratings and price targets can be found at MarketBeat.