What happened
Shares of Arista Networks (ANET +2.52%) rallied 25.9% in August, according to data from S&P Global Market Intelligence.
The gain was all the more impressive as August saw a significant pullback in most technology stocks after a hot start to the year.
The month began well when the data center switching company reported impressive growth in the second quarter on July 31, coming in higher than expectations. And the month ended well, too, as an analyst boosted his price target on the stock.
NYSE: ANET
Key Data Points
So what
In the second quarter, Arista grew revenue 39% to $1.46 billion, while adjusted (non-GAAP) earnings per share soared 46% to $1.58, with both figures beating analyst expectations.
Arista's open-source software-driven switches have been gaining lots of market share in recent years as its more flexible software-based data center switches and network routers were increasingly adopted by cloud giants. Yet with the stock having run a lot since the AI-driven breakout for tech stocks this May, some may have grown cautious due to moderating non-AI cloud spending amid economic uncertainty.
However, the earnings report seemed to put that concern to rest, as Arista reported strong results from enterprise customers for on-premises data center networking, as well as strong international growth in Europe and Asia. Those segments and geographies were thought to be challenged at the moment, so Arista's strength there was a surprise. As a result, management took up its full-year revenue growth estimate from 25% to 30%.
Then toward the end of the month, Arista's stockholders received more good news, as analysts at Citi upgraded Arista from neutral to buy, while increasing the firm's price target on the stock from $177 to $220.
The analysts point to the prospect of improving cloud spending in traditional non-AI computing workloads next year, as well as Arista's AI innovations to come. Right now, Arista isn't benefiting fully from the AI revolution, as most AI workloads use Infiniband for networking, where Arista doesn't have as much exposure. But ethernet-based networking should improve and take more market share in AI over time, which is where Arista shines. Of note, Arista and other tech giants formed the Ultra Ethernet Consortium in July, which will focus on improving ethernet's capabilities for AI applications. Arista is also innovating its EOS operating system for the unique demands of AI traffic, and those innovations should also ramp up next year and into 2025.
Now what
Arista currently trades for about 35 times earnings, so the stock doesn't look particularly cheap at first glance. However, the company is generating impressive growth and profitability, with both operating margins and return on equity in the mid-30% range.
While the stock has had a good run, the need for fast and efficient networking isn't going away in the age of AI, and Arista's EOS operating system is clearly catching on with big customers. It's a stock to monitor and likely to buy on any significant pullbacks.
