This network player has the potential to become a Wall Street darling in the coming months.
Most investors considering artificial intelligence (AI) stocks are drawn to big-name companies, such as: Nvidia, broadcom, advanced micro devicea hyperscaler that builds large AI clusters. However, other companies are playing a key role in building the high-speed networks that deliver low-latency data across these clusters. Without a critical networking layer, even the fastest GPU cannot meaningfully process large-scale AI workloads.
meet Arista Networks (ANET 0.28%)is well positioned to benefit from the increasing adoption of Ethernet networking in place of proprietary InfiniBand networks around the world. The third quarter of fiscal 2025 was the 19th consecutive record quarter, with revenue increasing 27.5% year over year to $2.3 billion and non-GAAP net income increasing 25.1% to $962.3 million. While these numbers are significant, the company’s future growth prospects are even stronger.
Image source: Getty Images.
Arista stock trades at a P/E ratio of 47.5x, so at first glance it doesn’t look like it’s undervalued. But given the AI networking opportunity and the company’s exceptional earnings visibility, the fundamentals appear to be moving even faster than the company’s stock price.
This is where the market still doesn’t seem to understand Arista Networks’ true potential.
AI networking opportunities
Hyperscalers are increasingly building multi-petabit or gigawatt-scale data centers with multiplane AI networks (multiple parallel network layers to independently process different data traffic within an AI cluster) to support the synchronization of thousands of GPUs across large-scale AI training and inference workloads.
Arista’s high-performance, low-latency Ethernet switches and Arista enhanced operating system are now widely deployed in modern data center architectures. To meet burgeoning networking demands, the company expanded its hardware portfolio with next-generation 800 Gigabit R4 series networking switches designed for AI clusters, cloud data centers, and scale-up environments. As such, the company is one of the few network vendors able to support the industry’s transition from 400 Gigabits to 800 Gigabits and ultimately 1.6 Terabit network speeds.
Arista is also playing a key role in setting standards for open-source, interoperable Ethernet-based networks that can power large-scale AI clusters through its work with the Ultra Ethernet Consortium and the Ethernet in Scale-Up Networking project.
Driven by these catalysts, Arista expects AI-related networking revenues to reach at least $1.5 billion in 2025 and $2.75 billion in 2026. The company also expects its addressable market to exceed $100 billion in the next few years. This highlights the company’s significant growth potential in the networking space.
Today’s changes
(-0.28%) $-0.36
current price
$127.16
Key data points
Market capitalization
$160 billion
daily range
$125.08 – $129.54
52 week range
$59.43 – $164.94
volume
5.9K
average volume
7.5M
gross profit
64.34%
hyperscaler trading
Arista has deep relationships with two major hyperscalers; meta platform and oraclehas become one of the company’s strongest competitive advantages.
The company co-developed Disaggregated Scheduled Fabric (DSF), a two-layer Ethernet-based networking architecture, with Meta Platforms to deliver predictable, congestion-free performance for large-scale AI training clusters. Meta has already migrated its AI training cluster to this DSF networking architecture.
Wall Street appears to have noticed this tailwind. Research firm Evercore highlights Arista’s growing role in data center networking, predicting the company will account for 30% of backend cloud networking spending in the next few years. A significant portion of this growth is likely to come from Meta expanding its data center footprint.
Oracle is also choosing high-performance Ethernet-based networking for its AI data centers and announced a partnership with Arista as part of the Oracle Acceleron platform.
strong financials
Arista boasts a strong financial profile with non-GAAP gross margin of 65.2% and non-GAAP operating margin of 48.6% in the third quarter. The company also has $10.1 billion in cash on its balance sheet and generated $1.3 billion in cash from operations in the third quarter.
Management expects Arista’s revenue to increase 26% to 27%, or $8.87 billion, at the midpoint of fiscal 2025, and then increase 20% year over year to $10.65 billion in fiscal 2026. This includes AI data centers as well as significant revenue contributions from the enterprise campus segment.
The company’s acquisition of VeloCloud further strengthens its campus network offering. Mauricio Sanchez, an analyst at Dell’Oro, noted that the deal adds production-proven, enterprise-grade Software-Defined Wide Area Network (SD-WAN) products, an established sales channel, and more than 20,000 customers to Arista’s portfolio.
Arista’s solid long-term outlook also highlights the company’s confidence in its growth trajectory despite macroeconomic concerns and increased competition.
The evaluation seems to be justified.
Despite strong fundamentals, Arista stock has fallen about 18% over the past month. The company beat consensus estimates for sales and profits in the third quarter, but investors were likely expecting even stronger results.
Investors are also concerned about NVIDIA’s foray into Ethernet networking with its Spectrum X platform, which has seen great success with customers such as Meta Platform and Oracle. Wall Street sees this as a threat to Arista’s growth.
However, this concern is misguided as it supports a larger industry trend: the move to Ethernet networking. Despite the popularity of Nvidia’s Spectrum-X Ethernet switches, the available market opportunity is vast. Therefore, none of these concerns suggests a significant deterioration of Arista’s long-term theory.
Despite its size, Arista’s premium valuation seems justified considering its growth rate of over 20% over the next two years. The company’s profit margins are also more similar to a software company than a traditional hardware company. Coupled with the standardization and rapid adoption of Ethernet networking, Arista is now proving to be a smart but conservative choice.
