Up 33% YTD, Is It Too Late to Buy This Breakout AI Stock?

Amid rising artificial intelligence (AI) adoption, the demand for cutting-edge data center equipment is soaring. As AI, internet of things (IoT), and machine learning (ML) drive the need for advanced Ethernet switches and routing, the global data center equipment market is set to skyrocket to $164.4 billion by 2031, expanding at a 13.2% CAGR.

Arista Networks, Inc. (ANET) is meeting the moment with its new 7060X6 Etherlink AI platform, crafted to handle heavy AI workloads. This cutting-edge tech efficiently connects processing units, addressing key data-crunching challenges in the AI industry.

ANET stock has delivered impressive returns this year, rising more than 33% so far in 2024 on the back of strong earnings and optimistic guidance, thanks to increased data center spending driven by AI advances. But with ANET already up over 75% over the past year, how much upside is left in this breakout data center stock? Let's take a closer look.

About Arista Networks Stock

Incorporated in 2004, Arista Networks, Inc. (ANET) is a Santa Clara-based leader in crafting data-driven networking solutions for data centers, campuses, and routing environments worldwide. ANET is best known for its cutting-edge Ethernet switches and routing solutions, seamlessly blending hardware and software. 

Arista's open architecture offers unparalleled customization, enhancing network flexibility by enabling diverse software to communicate efficiently. Its modular hardware allows hassle-free upgrades, making it a favorite in high-performance computing and data centers. 

With the new Universal Network Observability (UNO) feature on CloudVision, Arista enhances troubleshooting through AI-driven insights, solidifying its position as the go-to for AI data centers. Plus, Arista's partnership with Nvidia Corporation (NVDA) to create holistic AI data center solutions, slashing job completion times, further boosts ANET's appeal.

Valued at $98.7 billion by market cap, shares of Arista Networks have rallied 75.4% over the past 52 weeks and 33.7% on a YTD basis, outpacing the broader S&P 500 Index's ($SPX)comparable returns of 15.8% and 8.7%, respectively. In fact, after ANET’s impressive Q2 earnings report, its shares rallied 11.3% in a single session on July 31.

Priced at 18.15 times sales, Arista trades at a premium to its information technology sector peers, like Cisco Systems, Inc. (CSCO) and Juniper Networks, Inc. (JNPR).

Arista Networks Beats Q2 Estimates

The company reported solid fiscal Q2 earnings results on June 30, surpassing Wall Street’s forecasts. Revenue surged 15.9% annually to $1.7 billion, thanks to a strong performance in the enterprise vertical that highlighted Arista's expanding role in the AI hardware market. Adjusted EPS jumped 32.9% to $2.10, beating projections by $0.16 per share.

With 81.3% of its net sales derived from the Americas and the rest internationally, Arista continues to dominate the Data Center and Cloud Networking space. During Q2, the company rolled out new solutions tailored for cloud, ISPs, and enterprise networks. These innovations not only elevated the customer experience, but also boosted engagement. 

Looking ahead, Arista projects Q3 revenues between $1.72 billion and $1.75 billion, with non-GAAP gross margins between 63% and 64% and operating margins at 44%. Arista anticipates strong demand for the rest of 2024, thanks to its robust portfolio and new product rollouts. With over 10,000 customers and 100 million ports deployed globally, Arista also sees solid traction from its new Etherlink AI platforms, pushing the shift from InfiniBand to Ethernet.

Analysts tracking Arista Networks predict GAAP EPS of $7.38 in fiscal 2024, up 20.6% annually, with the bottom line projected to surge by another 12.1% to $8.27 in fiscal 2025.

What Do Analysts Expect for Arista Stock?

ANET’s stellar quarterly performance and upbeat guidance led Deutsche Bank to raise its estimates on the networking equipment provider on July 31. Although the research firm kept a “Hold” rating, it raised the price target on ANET stock from $295 to $350, which implies an upside potential of 11%.

Deutsche Bank also upwardly revised its revenue estimates for fiscal 2024 to 2026 upward by 2% to 4%, and also increased its non-GAAP EPS estimates for 2024 to 2026 to reflect a 2% to 5% increase over previous projections.

Following the earnings report, Samik Chatterjee from JPMorgan (JPM) also increased ANET’s price target to $340, and maintained an “Overweight” rating. Similarly, Barclays raised the price target on Arista Networks to $341 and kept an “Overweight” rating.

Analysts are bullish about ANET stock’s prospects, with a consensus “Moderate Buy” rating overall. Among the 23 analysts covering the stock, 15 are highly bullish with a “Strong Buy,” two advise a “Moderate Buy,” five suggest a “Hold,” and one has a “Strong Sell” rating.

The mean price target for ANET is $357.70, indicating an upside potential of 13.5% from current levels. The Street-high target price of $432 implies the stock could rally as much as 37.2%.