Arista Networks Stock Plunges Despite Strong Q3 Results as AI Infrastructure Growth Shows Signs of Deceleration

Arista Networks beats expectations but its guidance worries investors - SiliconANGLE

Arista Networks beats expectations but its guidance worries investors Arista Networks Inc. posted higher revenue and profit during the third quarter, but its guidance for the current quarter suggests sales growth will virtually come to a halt on a sequential basis. The cloud networking company reported earnings before certain costs such as stock compensation of 75 cents per share, surpassing the analyst consensus estimate of 72 cents, while revenue for the period rose 27% from a year earlier to $2.31 billion, ahead of the $2.26 billion forecast. The earnings and revenue beat helped Arista to boost its bottom line, with net income of $853 million, up from a $748 million profit in the year-ago period. Arista Chairperson and Chief Executive Jayshree Ullal (pictured) said the results prove that the company's "centers of data" strategy is resonating well with both customers and analysts. "After yet another strong performance, Arista is well-positioned as a strategic networking partner with continued durable execution," she said. The company has enjoyed dramatic growth since the start of the artificial intelligence boom that kicked off in late 2022 with the emergence of ChatGPT. It has become one of the AI industry's prime beneficiaries because it sells essential data center infrastructure such as premium network switches and high-performance routers, which are key to enabling higher bandwidth. Arista's networks are in big demand because most AI workloads rely on enormous clusters of graphics processing units that need to work in tandem with one another. As such, they need a blazing-fast networking infrastructure to support this, and that's exactly what Arista provides. The company has built up an impressive customer base, serving major players in the AI industry like Meta Platforms Inc., as well as stock exchange operators such as Deutsche Börse and the world's top racing league, Formula One. However, the company's guidance suggests it may be about to hit a bump in the road. It said it's looking for revenue of between $2.3 billion and $2.4 billion in the current quarter. The midpoint of that range, $2.5 billion, is just ahead of the Street's forecast of $2.33 billion, and would amount to growth on a sequential basis of less than 1%, down from 5% growth in the third quarter and 10% in the second. Arista is also forecasting an adjusted gross margin of between 62% and 63%, which trails the Street's estimate of 63.2%. Those numbers gave Arista's investors plenty of food for thought, and some of them decided to bail on the company, sending its stock down 13% after-hours. On a conference call, Arista executives explained that the slowdown is due to problems with shipments rather than demand. They insisted that demand remains strong, but the company has not been able to ship everything it needs to keep pace with this. With regard to margins, executives said these could face pressure if its product mix leans too far towards AI and the cloud. Still, analysts believe Arista is making encouraging progress on the product front that bodes well for its long term future. During the quarter, the company launched the next generation of its network switch family targeted toward AI data centers, known as the R4 Series platform. It's an 800-gigabit-per-second system that's designed to support high-capacity AI clusters and sets a new milestone in terms of networking speed with its 3.2-terabits-per-second HyperPorts, while delivering superior energy efficiency to reduce the total cost of ownership. "Arista's leadership in the 800GbE switching market and its aggressive portfolio expansion are well-timed to benefit from a 90% average annual growth rate in this segment over the next five years," said ZK Research analyst Zeus Kerravala. Despite today's after-hours drop, Arista's stock is up almost 39% in the year to date, far ahead of the broader S&P 500 Index, which has gained just over 15% so far this year.

Why Arista Networks Stock Is Sinking Today | The Motley Fool

The artificial intelligence (AI) networking company's guidance wasn't all that optimistic. Despite reporting third-quarter results that beat analyst expectations across the board, shares of artificial intelligence (AI)-focused networking provider Arista Networks (ANET 6.86%) slumped on Wednesday. By 11:35 a.m. ET, the stock was down about 7.1%, according to data provided by S&P Global Market Intelligence. Arista reported third-quarter revenue of $2.308 billion, up 27.5% year over year and slightly higher than the average analyst estimate. Adjusted earnings per share came in at $0.75, up from $0.60 in the prior-year period and $0.04 higher than analyst expectations. "We are proud to have delivered 25% non-GAAP EPS growth in this quarter, a reflection not only of strong demand, but also of the disciplined execution of our strategic roadmap," said Arista CFO Chantelle Breithaupt. Arista is benefiting from booming demand for AI infrastructure. The company's high-speed networking technology is a perfect match for AI data centers, and it counts many of the largest cloud computing companies as customers. However, while buildouts of AI data centers are ramping up, Arista's guidance may be giving investors pause. Arista expects to generate between $2.3 billion and $2.4 billion in revenue in the fourth quarter, which represents year-over-year growth of about 22% at the midpoint. This expected slowdown could be what's driving the stock lower, especially considering the volatility in AI stocks recently, as some well-known investors warn of a bubble. While Arista performed well in the third quarter, investors may have been looking for more optimistic guidance. Based on analyst estimates for 2025 adjusted earnings per share, Arista stock trades at a price-to-earnings ratio of about 50. That's a pricey valuation, given the company's slowing growth. Arista is heavily exposed to the risk of an AI bubble popping, and another risk comes from customer concentration. Microsoft and Meta Platforms accounted for 35% of revenue combined in 2024, so any pullback from either would have an outsize impact. Arista is still growing at a double-digit pace, but the valuation is a reason for concern.