Meta and Microsoft, ‘cloud titans’, bring growth and risk to Arista Networks, analyst says

Arista Networks Inc. is experiencing revenue growth fueled by so-called “cloud titans” led by Meta Platforms Inc. and Microsoft Corp. But at least one analyst warns it could be a double-edged sword for Arista.

Arista ANET, cloud and data center software provider,
reported third-quarter earnings and outlook that beat Wall Street’s relatively low Halloween consensus. Meta META,
and MicrosoftMSFT,
weighed heavily on the company’s figures.

“Cloud Titans dominate the results,” Raymond James analyst Simon Leopold wrote in a note released Monday. Arista, he noted, expects the group to contribute 45% of its sales in 2022.

However, the importance of such a small group of companies to the growth of Arista can also pose problems. “This level of focus presents a risk,” added Leopold, noting that Cloud Titans have grown from 30% of sales at the start of the year to 45% for the full year. “The group has clearly eclipsed other verticals in terms of growth,” he said.

See now: Arista Networks stock muted as earnings cross analyst low

But as things stand, the cloud titans look poised to further fuel Arista’s growth. “Last week, top client Meta offered a better than expected capital investment forecast for 2023,” Leopold wrote. “Furthermore, our checks indicate that Google GOOG,
selected Arista, Cisco CSCO,
Juniper JNPR,
and Nokia NOKIA,
to move some white box platforms that multiply in 2023.”

“White box” refers to data center equipment that is not manufactured by a well-known company.

Last week, Facebook’s parent company Meta raised its 2022 investment outlook to $33 billion from $30 billion to $34 billion previously. For 2023, Meta has given an investment outlook in the range of $34 billion to $39 billion, which it says is driven by investments in data centers, servers and network infrastructure. The tech giant also said an increase in AI capability drove “almost all” of its capital spending growth in 2023.

Raymond James has a market note on Arista.

See now: Data center providers get a boost as Facebook parent Meta boosts capital spending on AI

JP Morgan has an overweight rating on Arista. In a note on Monday, JP Morgan analyst Samik Chatterjee said this was based on expectations of resilient revenue growth due to growing cloud investment from cloud titan customers at the time. approaching 2023. The analyst also pointed to “favorable upside positioning” of 400G adoption. at customers using Arista’s hyperscale networking equipment.

Arista’s “spooky cloud earnings” should be seen as a “lasting treat,” KeyBanc Capital Markets analyst Thomas Blakey wrote in a note released Tuesday. KeyBanc Capital Markets reiterated its overweight rating on Arista, but cut its price target to $161 from $170, citing compressed tech valuation multiples.

Arista stock rose 2% on Tuesday, while the S&P 500 SPX index,
decreased by 0.6%. Arista shares have fallen 14.3% this year, compared to 19.3% for the S&P 500.

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