Arista Networks Adds to the Cloud Fog

As earnings results roll in from many of the companies building cloud infrastructure, the picture isn't getting much clearer. In its quarterly earnings announcement, datacenter networking provider Arista Networks posted strong results on Monday night. But it added more fears about the impact of a widespread slowdown in cloud infrastructure spending as company executives cautioned about their visibility into long-term cloud infrastructure investment.

"Our visibility to customer forecasts, therefore, are now beyond six months -- or now below six months, I should say, and they are shrinking," said Arista CEO Jayshree Ullal on the earnings conference call. "Despite macro uncertainty, we endorsed consensus of 26% annual growth to approximately $5.5 billion revenue in 2023. On the product side, we made many exciting Q1 announcements."

Some Wall St. analysts pointed out that management comments have contributed to growing uncertainty about cloud growth.

“Visibility into the cloud customers has normalized, faster than we expected, and this as well as no upside to the 2023 outlook contributed to the shares coming under pressure, down ~7% after hours,” wrote Raymond James analyst Simon Leopold in a research note titled “Cloud Fog Rolling In," published on Monday night.

Arista Networks sold off hard today as general market malaise contributed to the weakness. Shares were hammered down 14.76%, $24.64 to $136 after hitting new highs as recently as two weeks ago.

Cloud Sales Still Strong But Visibility Shorter

Arista reported $1.351 billion in sales (Street estimates were $1.31 billion), up 54% year-over-year (y/y). Earnings per share were $1.43 per share vs. Wall St. estimates of $1.35, representing y/y growth of 71%. Arista continues to be boosted by its strong representation as one of the networking vendors of choice among the cloud titans, including Meta and Microsoft, which have historically been two of Arista’s largest customers.

The company still expects Meta and Microsoft to each contribute more than 10% of annual sales and maintain double-digit growth, even though long-term visibility has been reduced. The company remains on track for 26% annualized revenue growth.

Arista management said that use cases for wide-area networking (WAN) and artificial intelligence (AI) are providing a growth boost, but other activity in cloud and enterprise infrastructure has slowed. As noted earlier, in one interesting observation, Arista management said that visibility into cloud spending from its largest customers has now compressed to six months, rather than 12 months previously, indicating a reduction in long-term visibility.

Is It Time to Buy?

Arista has been one of the best-performing datacenter networking stocks for years, blowing away rivals such as Juniper Networks and Cisco. For example, Arista is up more than 100% over the past two years, while Cisco shares have been basically flat.

Overall, there has been uneasiness about the expansion of cloud infrastructure as many of the largest so-called hyperscale cloud providers have slowed growth and spending.

Yet some analysts see the coming months as an opportunity to pick up shares if a summer slump persists. For example, Rosenblatt analyst Mike Genovese said investors should look at buying Arista on any 10%-15% pullback.

Several Wall St. analysts, including Leopold and Genovese, are tracking Arista’s potential in generating growth from Artificial Intelligence clusters, although that revenue remains small and is more likely a story for 2024, according to Genovese.

“[W]e believe the thesis about AI-clusters becoming a significant revenue driver for Arista will be more correct in 2024, than 2023, and even more so in 2025, ” wrote Genovese in a research note.