Data center equipment designer stocks Arista Networks (network -1.78%) It's been on fire, more than doubling since the start of 2023. Its Q4 2023 earnings update vindicated this company's dominant position in the market as the realization settles in that artificial intelligence (AI) — or perhaps just accelerated computing — is more than… A passing fad.
But since Arista is ultimately a hardware-driven company, periods of rapid growth can end quickly. In fact, growth is expected to slow slightly for Arista in 2024. Is this still the best stock to bet on the future of data centers and AI computing?
2023 was on fire, followed by 2024's buzz
2023 has been an epic rebound for Arista. After several years of developing AI supercomputing, the company has achieved impressive growth numbers – with “Cloud Titan” customers. dead (dead -2.21%) (21% of last year’s total revenues) and Microsoft (18% of revenue) leads the charge. A group of major technology companies have been building new data center infrastructure to support accelerated computing, and Arista is a key partner in helping them put all the pieces together.
|
Financial scale |
2023 results |
Annual change % |
|---|---|---|
|
he won |
$5.86 billion |
34% |
|
Earnings per share (EPS) according to generally accepted accounting principles |
$6.58 |
54% |
|
Adjusted earnings per share |
$6.94 |
52% |
Data source: Arista Networks.
Data by YCharts.
In the chart above, you can see Arista's revenue and profitability skyrocketed in the wake of the pandemic. This is thanks in large part to “Cloud Titan” customers (particularly Microsoft and Meta) who have built and upgraded their own data centers to support all the new Internet traffic they've captured in the past few years. For Microsoft, it was primarily its Azure cloud platform for businesses, and for Meta, its consumer-facing apps like Facebook, Instagram, and WhatsApp need to drive more traffic and launch new AI-powered advertising services for marketers. Arista's engineering teams have been busy helping both companies expand their data center capabilities.
But things could finally start to slow down in 2024, mostly because large data center customers ease up on their infrastructure spending (all together, including Meta and Microsoft, “Cloud Titans” accounted for 43% of total sales last year). Management said other enterprise customers should continue to grow, but the bottom line is that revenue is expected to grow only 10% to 12% next year. RW: Do these tables really add anything to the piece? We've already mentioned 10% to 12% projections in the text, and piling them on top of each other may be more distracting than helpful. We can simply add this information to the text and tone down some of the bloated information and we can make it clearer and more intelligible to less experienced readers in the process.
Growth is growth, so it's not a big deal. After all, Arista retains all of its big gains from the past few years. But the problem with the slowdown is that Arista shares now trade for a whopping 40 times trailing 12-month EPS and 42 times trailing 12-month free cash flow. This is the highest valuation it has traded at in years, excluding the pandemic when shares rose for a while. Is this really a good stock to buy now, and is data center AI a permanent growth trend or not?
Arista's big advantage
For many years, Arista has been grabbing market share, especially at the expense of the leading networking hardware giant cisco. Cisco isn't completely ignoring the ball, but it has been focusing on software lately. Remember the huge acquisition pending Splunk?
Because of this, and Arista's leading network hardware platform and embedded software suite, I see no reason to change direction in Arista's favor any time soon, especially with the development of new AI infrastructure (which Arista is also helping to engineer). Complexity of data center needs moving forward.
Image source: Arista Networks.
While Arista takes a cautious view through 2024, it remains confident in its ability to grow at a low-teens rate over the long term. Along the way, it achieves high rates of profitability. At this point, the company has just over $5 billion in cash and investments on balance and no debt, which could fuel its ambitions.
In light of this, Arista is a highly priced stock, but a reasonable one if you take into account its excellent growth prospects over the next five years and beyond. I'm thrilled to retain my position, as Arista is a key partner for all types of data centers, and will not be easily displaced as the AI era continues apace.
Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Nick Rossolillo holds positions at Arista Networks and Meta Platforms. The Motley Fool has positions in and recommends Arista Networks, Cisco Systems, Meta Platforms, Microsoft, and Splunk. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
