Arista Networks (ANET) Should Have a Strong 2024 According to Meta’s Outlook

Stock (Symbol)

Arista Networks (ANET)

Stock Price

$210

Sector

Data is as of

Expected to Report

Company Description

The Company cloud networking solutions consist of its Extensible Operating System (EOS), a set of network applications and its Gigabit Ethernet switching and routing platforms.

Its cognitive single-tier Spline campus network extends EOS across the campus workspace and the data center.

CloudVision, its network-wide approach for workload orchestration and automation, leverages EOS and Cognitive WiFi features, to deliver a workflow orchestration and automation solution for cloud networking to its enterprise customers.

It sells its products through both its direct sales force and its channel partners.

The Company’s end customers span a range of industries and include large Internet companies, service providers, financial services organizations, government agencies, media and entertainment companies and others. Source: Refinitiv

Sharek’s Take

• Meta expects higher infrastructure-related costs next year.
• Meta expects 2023 capital expenditures around $28 billion.
• Meta expects 2024 capital expenditures of $33 billion, with growth driven by investments in servers, including both non-artificial AI and AI hardware.

Arista Networks makes network switches that help computer servers communicate in data centers. ANET provides Gigabit Ethernet to many companies that run high volume servers that require a lot of bandwidth. Gigabit Ethernet switches are the hardware that connects computers and servers in local networks. The faster the Ethernet switch, the faster data is transmitted between the computers and the local networks. Arista provides equipment for the back-end of a network (like AI) and the front-end (infrastructure). Customers are now doubling-down in back end spending (AI). In the future they see more investments in the front-end s well. Competitors include Cisco Systems and Juniper Networks. Since 2016, ANET has outsold Cisco when it comes to small and large internet firms upgrading to 100-gigabit Ethernet switches. In terms of 2022 product lines, Arista had three categories:

1. Core cloud and datacenter products: deployed across 10-, 25-, 100-, 200- and 400-gig speeds, which drove 68% of revenue 2022.
2. Routing, replacing routers, and Arista’s Cognitive Campus: Cognitive Campus is a platform for companies to manage their in-house (on campus) network, integrate WiFi, and allow for users outside the building, like employees that work from home. Campus and routing was 14% of revenue in 2022.
3. Network software and services based on subscription models: includes Arista A-Care IT support and CloudVision, the company’s software to collect data, detect connectivity issues, and integrate cybersecurity. Software as a service (SaaS) was 18% of revenue in 2022 as CloudVision grew from 1500 to 2000 customers during the year.

Arista has been performing magnificently for a while now.  ANET has an Estimated Long-Term Rate of 20% but I believe this is more of a 30-35% grower. The stock’s P/E is just 29, and I feel P/E of 35 seems reasonable for this stock. ANET is one of my largest positions in the Growth Stock Portfolio and Aggressive Growth Portfolio. This stock is a true market leader at this time.

One Year Chart

The Est. LTG of 20% isn’t high enough in my opinion. Management said the company is growing at 30% now. I think 35%.

The P/E is 29, same with last qtr. But this qtr I’m looking ahead to 2024 profit estimates to calculate this figure, as we are now in ANET’s fiscal Q4.

Note qtrly profit Estimates show growth could slow, but ANET has been beating the street so I think these Estimates are too low.

Earnings Table

• Do note that revenue growth continues to decelerate, slowing from 55% 4QtrsAgo, to 54% 39%, and now 28%.
• Product revenue (85% of total revenue) grew 27%.
• Service revenue (15% of total revenue) grew 33%.
• Gross margin expanded to 63.1% from 61.2% a year ago due to better supply chain overheads and higher enterprise contribution.
• Notice earnings continue to jump on a sequential basis:
  $1.41 4QtrsAgo
  $1.43 3QtrsAgo
  $1.58 2QtrsAgo
  $1.83 last qtr.
• Revenue growth was driven by the momentum in enterprise, cloud, and AI, with the latter two projected to represent more than 40% of revenues in the future.
• In enterprise, high-tech and financials have historically been the top verticals, but the company has also been seeing higher contributions from healthcare and education.
• The Americas contributed 78.5% of total revenues last qtr while international accounted for 22.5%. International contribution increased year-over-year due to improved contributions of enterprise customers in Europe, the Middle East, and Africa, as well as Asia Pacific.

Annual Profit Estimates increased again this qtr. For 2023, management raised their outlook to a revenue growth of 30%, up from 26% previously. Management raised its outlook due to improving lead time.

Qtrly profit Estimates are for 21%, 15%, 11%, and 1% growth the next four qtrs. Analysts predict revenue will climb 20% next quarter.

Fair Value

My Fair Value is a P/E of 35.

This stock seems to have 20% upside for 2024. And remember ANET has been upping estimates.

Bottom Line

Arista Networks (ANET) really seems to have the best computer networking equipment in the market. Management says its a best of breed company.

Last qtr I said Arista’s business is strong right now, but there’s uncertainty with one Cloud Titan (perhaps Meta?) and its ordering size. Now that Meta increased its infrastructure espenses for 2024, I feel more confident with Arista being a top holding.

ANET stays at 2nd in the Growth Stock Portfolio Power Rankings and Aggressive Growth Portfolio Power Rankings.

Power Rankings

2 of 29

Aggressive Growth Portfolio

2 of 17

Conservative Stock Portfolio

N/A