Nvidia’s (NASDAQ: NVDA) CEO, Jensen Huang, recently announced that the company is ‘all in on Ethernet,’ impacting data center networking design and software providers like Arista Networks (NYSE: ANET).
With Nvidia’s plans to develop its data centers, competition for Arista Networks is set to intensify. As a result, Wall Street analysts have shifted their outlook on ANET stock from bullish to more cautious, now predicting only a 3% potential upside from its current price of $308.05.
Despite these concerns, ANET stock has performed well this year, gaining 33% in value in 2024.
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With solid backing from financials and outlook, Arista Networks won’t go down without a fight.
Q1 was particularly good for Anet Networks
Arista Networks deserves recognition for its achievements. The company has found its stride and is maintaining a rapid growth pace. In the first quarter, revenue increased by 16% yearly to $1.57 billion. Management anticipates an 11% year-over-year revenue increase in the second quarter.
This is notable as it builds on a 34% full-year revenue increase in 2023 and a 49% increase in 2022, indicating that Arista benefits from the current data center construction boom.
Even more impressive than revenue growth is Arista’s earnings performance. In the first quarter, earnings per share (EPS) rose by 48% year over year. Additionally, free cash flow (FCF) increased by 37% to $505 million, resulting in a healthy FCF profit margin of 32%.
Anet Networks and Nvidia are more like David vs Goliath
Nvidia’s success isn’t solely due to its data center GPUs for AI; its networking hardware, acquired through a merger with Mellanox in early 2020, also plays a crucial role. This includes InfiniBand and Ethernet-based technologies, which are causing market concerns with Nvidia’s recent focus on Ethernet.
The Spectrum-X Ethernet platform positions Nvidia as a direct competitor to Arista Networks, which counts major companies like Microsoft (NASDAQ: MSFT) and Meta Platforms (NASDAQ: META) among its top customers.
However, there are reasons to be optimistic about Arista’s future. First, Arista reports healthy spending from its top customers, particularly as they expand global cloud-network coverage. Second, Arista is developing its Ethernet-based AI networking technology to counter Nvidia.
Last summer, Arista, Broadcom (NASDAQ: AVGO), and others launched the Ultra Ethernet Consortium to advance Ethernet technology for the AI era. While the benefits of this initiative may take a few years to materialize, Arista’s strong recent financial performance indicates its continued engagement with customers on networking infrastructure projects.
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