NVIDIA Partnership And AI Developments Will Open New Markets

Key Takeaways

• Strategic focus on AI infrastructure and partnerships could drive significant future revenue growth and diversification across various sectors.
  
• Large stock repurchase indicates confidence in future earnings growth, potentially enhancing earnings per share through a reduced share count.
  
• Arista's navigation of AI deployment complexities and tariff uncertainties may pressure margins and revenues through increased costs and execution risks.

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.

• Arista Networks is capitalizing on growth in AI and data center sectors, aiming for a $750 million goal in AI by 2025, which could significantly drive future revenue growth.
  
• The company's partnership with NVIDIA and focus on AI network acceleration for GPUs and AI accelerators suggests a promising growth trajectory in AI infrastructure, potentially enhancing revenue.
  
• Arista's entry into new markets, such as the federal sector, and expanded partnerships in sectors like high-tech and Web 3.0, signal potential for revenue diversification and growth.
  
• The company's strategic focus on innovating in campus and branch networking with its cognitive campus portfolio is expected to capture additional market share, impacting future revenue positively.
  
• Large stock repurchase programs, including a new $1.5 billion buyback, indicate confidence in future earnings growth and could enhance earnings per share by reducing the share count.

Arista Networks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arista Networks's revenue will grow by 18.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 40.7% today to 39.0% in 3 years time.
• Analysts expect earnings to reach $4.6 billion (and earnings per share of $3.47) by about May 2028, up from $2.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.5 billion in earnings, and the most bearish expecting $3.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.7x on those 2028 earnings, down 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

• The ongoing uncertainty regarding tariffs and reciprocal tariffs, as well as challenges with manufacturing location decisions, could lead to increased operational costs and pressured margins, impacting net earnings.
  
• Arista's dependence on new and evolving AI technology—along with customer deployments moving from trials to production—introduces potential volatility in revenue recognition and complicates inventory management, potentially affecting revenue stability.
  
• Variability in customer acceptance criteria and purchasing patterns, particularly surrounding tariffs and supply chain challenges, could skew deferred revenue balances, adding unpredictability to financial forecasting and revenue projections.
  
• The transition to higher-cost and resource-intensive AI networks, alongside navigations of complex deployments, might necessitate substantial R&D investment, which could pressure operating expenses and net margins.
  
• While embracing new AI-driven opportunities and cloud solutions, Arista faces execution risks related to rapidly scaling their offering in competitive tech landscapes, possibly leading to unpredictable revenue trajectories and margin variations.

Valuation

• The analysts have a consensus price target of $107.055 for Arista Networks based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $11.7 billion, earnings will come to $4.6 billion, and it would be trading on a PE ratio of 36.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $90.77, the analyst price target of $107.05 is 15.2% 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.