Cloud And AI Adoption Will Drive Secular Network Growth

Key Takeaways

• Rapid adoption of AI, cloud, and IoT technologies is fueling sustained demand for Arista’s advanced networking solutions and expanding its addressable markets.
  
• Increasing recurring revenue from software and services enhances profitability and earnings growth, supporting long-term operating leverage and industry outperformance.
  
• Increased customer concentration, evolving industry trends, and global supply chain pressures threaten Arista’s revenue stability, pricing power, and long-term profit margins.

Catalysts

Engages in the development, marketing, and sale of data-driven, client to cloud networking solutions for AI, data center, campus, and routing environments in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.

• The accelerating shift to AI-driven workloads and the expanding deployment of high-performance GPUs and accelerators at hyperscale is driving demand for advanced, scalable Ethernet-based networking, enabling Arista to secure multi-year, high-visibility contracts with hyperscalers. This trend is strongly supportive of future revenue growth due to large ramps and deepening penetration in AI data centers.
  
• Exponential increases in global data consumption and the proliferation of IoT devices are creating persistent, secular demand for flexible, high-speed network infrastructure, positioning Arista’s portfolio for durable, long-term revenue growth as enterprises and cloud providers modernize their networks at scale.
  
• Arista’s continued expansion and adoption of its software-driven EOS platform and CloudVision management suite increases the mix of high-margin, recurring software and services revenue, which is expected to provide operating leverage and support ongoing expansion in net margins and earnings.
  
• Successful expansion beyond cloud titans into new verticals—including federal, high-tech, and decentralized web infrastructure—creates new multi-billion-dollar addressable markets, supporting both top-line growth and a more diversified, resilient revenue base.
  
• Arista’s leading role in the migration from legacy networking to 400G and 800G Ethernet switching, especially for AI and next-generation cloud workloads, is enabling significant share gains in a consolidating industry, which should fuel outsized revenue growth and drive above-industry average earnings expansion over the long term.

Arista Networks Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Arista Networks compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Arista Networks's revenue will grow by 26.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 40.7% today to 38.5% in 3 years time.
• The bullish analysts expect earnings to reach $5.5 billion (and earnings per share of $4.05) by about May 2028, up from $2.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 41.3x on those 2028 earnings, up from 40.0x today. This future PE is greater than the current PE for the US Communications industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Arista Networks Future Earnings Per Share Growth

Risks

• Heightened geopolitical tensions, rising protectionism, and ongoing tariff uncertainty have already caused major operational disruptions and could directly impact Arista’s ability to ship internationally, increasing supply chain costs and negatively affecting both future revenue growth and gross margins.
  
• The company’s growing reliance on a handful of hyperscale cloud and AI customers for a significant portion of its business creates customer concentration risk, making Arista’s revenue and earnings increasingly vulnerable to abrupt changes in purchasing cycles, reduced CapEx, or loss of major accounts.
  
• Industry trends toward open-source networking hardware and software, including the continued coexistence and growth of white box solutions and the move to software-defined networking, threaten to erode Arista’s historical hardware and software differentiation, reducing long-term pricing power and profit margins.
  
• There is mounting risk from industry consolidation among large cloud and data center customers, as their increasing bargaining power could pressure Arista’s sales cycles, slow revenue growth, and force net margin compression through price concessions or higher investment in support.
  
• If the accelerating shift away from traditional network hardware toward virtualized, software-centric, or highly commoditized networking ecosystems outpaces Arista’s innovation or market adaptation, it could significantly dampen future demand for Arista’s core products, thereby impacting long-term revenue and earnings.

Valuation

• The assumed bullish price target for Arista Networks is $145.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Arista Networks's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $145.0, and the most bearish reporting a price target of just $76.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $14.3 billion, earnings will come to $5.5 billion, and it would be trading on a PE ratio of 41.3x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $90.77, the bullish analyst price target of $145.0 is 37.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.