ANET Stock: Will Cisco-Rival Arista Join Nvidia As Among Top AI Stocks?

Many tech investors are familiar with the rise of Arista Networks (ANET) and how it outsmarted rival Cisco Systems (CSCO). Now there’s a new chapter unfolding in the ANET stock story, and it’s tied to artificial intelligence.

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ANET stock has gained 29% in 2023, following the November launch of startup OpenAI’s ChatGPT internet search software. Microsoft is OpenAI’s biggest investor. ChatGPT is part of a wave of generative AI technologies that could roil a host of industries by creating text, images, video and computer programming code on their own.

Arista management views AI as a likely driver of increased network traffic.

“When you start to think about (it), why would we need to see these continued investments in networking and expansion of networking? AI is one of those drivers in my mind,” Arista Chief Financial Officer Ita Brennan said at a recent Morgan Stanley conference. “And the more successful and pervasive that becomes, obviously, the more important it is.”

For Wall Street analysts, the arrival of ChatGPT was timely. Debate over the valuation of Arista stock hinges on how much revenue growth will slow.

1,360% Gain For ANET Stock

ANET stock has gained 1,360% since the company’s 2014 initial public offering, mainly due to how it ate Cisco’s lunch in the cloud networking market.

Santa Clara, Calif.-based Arista’s biggest customers are “cloud titans.” They’re Facebook-parent Meta Platforms (META), Microsoft (MSFT) and other builders of internet data centers. Amid the emergence of generative AI, Wall Street analysts say many of Arista’s customers will boost investments in networking bandwidth.

Arista sells computer network switches that speed up communications among racks of computer servers packed into “hyperscale” data centers. It designs them to ratchet up computing horsepower when demand surges.

Arista’s revenue boomed more than 48% in 2022 as Facebook and others increased data center spending. In 2023, analysts predict revenue growth of 26%. In 2024, analysts currently model sales growth of 12%.

“U.S. hyperscaler capital spending is expected to moderate meaningfully in 2023 relative to 2020 to 2022 growth rates with further downside risk driven by slowing expectations for GDP and overall (information technology spending),” Goldman Sachs said in a recent note to clients.

How It Could Revive Sales Growth

But depending on how much generative AI drives increased network traffic, revenue growth could re-accelerate.

First-quarter earnings for ANET stock are due May 1. Look for Arista management to give its outlook on AI’s impact.

What’s clear is that Wall Street analysts following ANET stock are on the AI bandwagon.

“Investors see Arista as an Nvidia-like AI play,” Needham analyst Alex Henderson said in a report to clients. “We think that’s a rational view, but it has also pushed Arista’s valuation up. In order to perform from here, we think Arista must deliver not just upside to 2023, but also strong growth in 2024.”

NVDA stock has gained 90% in 2023. All AI software needs computing power to find patterns and make inferences from large quantities of data. Chipmaker Nvidia has been viewed as among the top AI stocks.

Also, some analysts view Nvidia as a new rival of Arista. Nvidia acquired Mellanox in 2019. Nvidia also recently announced the rollout of new Ethernet network switches.

ANET Stock: AI Opportunity Beckons

Meanwhile, Morgan Stanley analyst Meta Marshall holds an upbeat view of Arista’s AI opportunity.

“AI workloads tax networks, particularly those from generative models, creating latency problems that slow these models unless addressed,” Marshall said in a March 2 note. “ANET is the biggest beneficiary in our coverage given the exposure to multiple hyperscaler customers.”

Marshall added: “For ANET, depending on the amount of the opportunity they capture and challengers that emerge, their cloud opportunity could grow at 14% to 27% over the next four years, from an estimated 15% baseline.”

At Evercore ISI, analyst Amit Daryanani expects upside from AI-driven network upgrades.

“AI networking will represent a $5 billion to $7 billion market by 2027,” Daryanani said in a recent note. “This can add $2 billion-plus to Arista’s revenue if they capture 30% share, consistent with their current share in cloud networking.”

Daryanani added: “While the recent focus has been on AI-driven upside, the real upshot for ANET is that they are becoming a networking platform company where they can offer solutions ranging from switching to security to analytics to observability all within their differentiated software offering.”

Since its IPO, the hyperscale cloud market has been the biggest growth driver of ANET stock. But Arista has also gained traction in the enterprise market for “campus” network switching gear sold to large companies.

ANET Stock: Enterprise Market

Cisco remains the biggest seller of enterprise network gear by far. Enterprise customers are large companies in financial services and other sectors, along with government agencies and educational institutions.

“While cloud titan growth slows in 2023, the rest of Arista’s business should accelerate,” UBS analyst David Vogt said in a note. “Within enterprise, Arista’s expectation for its campus segment has moderated a bit with the company expecting $750 million in revenue in 2025.”

Analysts expect cloud titans like Microsoft to spend the most on AI networking gear. But some large companies may need to upgrade as well.

For security reasons, many companies still invest in their own private data centers rather than shift computer workloads to the public cloud, where computers are shared. At the Morgan Stanley conference, Arista CFO Brennan pointed to the pharmaceutical industry, which he sees investing in its own networking gear.

“AI is largely going to be in the cloud, but a pharmaceutical company is not going to want to hand that over to the cloud,” he said. “They’re going to want to do that proprietarily. But you’ll obviously have broader, more generic AI applications in the cloud.”

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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