Cloud computing dominance makes Arista soar over Cisco

Arista Networks Inc. NYSE:ANET may not be as well known among tech investors as Cisco NASDAQ: CSCObut over the past year it has outperformed its larger rival by a wide margin.

Arista posted fourth-quarter results that beat analysts’ opinions after the closing bell on Feb. 12. The guidance was higher than Wall Street forecasts, but the stock failed to break out of the market’s broader downtrend in the following session.

However, when the S&P 500 Index recovered on February 14 and 15, Arista also rebounded.

Even with the gap narrowed, Arista stock found support well above its 50-day average, as you can see in the Arista Networks chart.

So far in 2024, Arista shares are up 12.81% compared to Cisco’s slight gain of 0.30%. Cisco recently said it would lay off more than 4,000 workers, an indication that the tech sector continues to slim down after exploding during an era of pandemic-related growth in recent years.

Arista shines while Cisco collapses

While Cisco shares remained stuck in a slump, Arista shares outpaced not only networking equipment makers but also other tech stocks in the Technology Select Sector SPDR fund NYSEARCA: XLK.

In the cloud computing subsector, Arista is the leader, boasting double-digit earnings and sales growth for the past eight quarters.

On its quarterly earnings conference call, CEO Jayshree Ullal said cloud titans, the industry giants that dominate cloud computing services and infrastructure, account for about 43% of revenue.

Businesses, including financial sectors, represent approximately 36% and service providers approximately 21%.

Sia Meta Platforms Inc. NASDAQ: META and Microsoft Corp. NASDAQ:MSFT are above 10%, customer concentration is 21% and 18% respectively, he said.

CEO thanks to Meta, Microsoft

Ullal added special thanks to these two large clients in particular, saying: “Despite multiple capex reductions last year and the normal volatility of the titan cloud and AI pivots, we cherish our privileged status with both M&Ms”.

As with cloud computing stocks, networking specialists are increasingly being seen as AI stocks.

In response to an analyst’s question about the partnership between Cisco and Nvidia Corp. NASDAQ:NVDA To build a more robust infrastructure for AI applications, Ullal referenced Arista’s work with Nvidia.

He mentioned Nvidia’s dominance of the AI ​​chip market, saying that he intends to work closely with Nvidia CEO Jensen Huang “to initiate a comprehensive AI network project.”

He also said Arista will work with other AI chip makers, including Advanced Micro Devices Inc. NASDAQ:AMD and Intel Corp. NASDAQ: INTC.

Analysts believe the stock is fairly valued

MarketBeat’s Arista Networks analyst forecast shows a consensus view of “moderate buy” with a price target of $271.38, an upside of 1.77%. In other words, Wall Street believes the stock is fairly valued.

This raises the broader question of whether the S&P 500 Index as a whole is perfectly priced, meaning that stocks are trading at fairly frothy levels, reflecting optimistic expectations and leaving little room for errors or disappointments in performance.

This appears to be the case with Arista Networks in particular, as investors were looking for even better guidance than the company offered.

Arista’s forward P/E ratio is 35, higher than the P/E ratio of 28.6 for the tech sector as a whole.

A high P/E ratio can be a double-edged sword. On the one hand, it suggests investor optimism and growth potential, but on the other, it indicates that a stock may be overvalued, resulting in increased risk.

Track record of major Wall Street views

Arista Networks earnings data from MarketBeat shows that the company has a long history of beating both top and bottom views, so it’s no longer necessarily a surprise when that happens.

This year, Wall Street expects the company to earn $7.47 per share, up 8%, indicating that earnings growth will likely slow in coming quarters. The three-year earnings growth rate is 48%, so that would represent a significant decline.

However, analysts believe the slowdown is largely due to shrinking backlogs.

However, this is not necessarily a significant problem, as it can indicate successful fulfillment of existing orders and a transition to focusing on new opportunities.

This appears to be the view on Wall Street: In 2025, Arista Networks’ earnings are expected to grow 14% as corporate investments in AI infrastructure continue to gain traction.

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