Arista Networks (NYSE:ANET) gained 2.6% in early trading Thursday after Citi upgraded the stock, calling it an early AI stock play as well as a play on a 400G cloud spending recovery.
Citi analysts upgraded shares to Buy from Neutral and raised his price target to $220 from $177, suggesting 17.6% from Wednesday's closing price.
"We upgrade ANET to Buy and expect 400G cloud spend to recover into next year as hyperscaler spending on traditional data center infrastructure rebounds and a top customer’s capex recovers," the analysts commented. "While round one went to InfiniBand, Arista and networking peers expect Ethernet to gain share in 2024/25 as AI clusters grow and are more broadly implemented across existing networks."
Analysts highlight that Capex concerns, centered around its two major customers (Microsoft and Meta), are receding. The June quarter capex results and FY23 outlooks for Arista's major cloud clients had mixed outcomes. Microsoft exceeded expectations, indicating robust growth, while Meta fell short of consensus, lowering its full-year capex projection. Despite valid worries about Meta's capex view, both Arista and the market had even graver expectations. Arista's management mentioned that Meta might contribute over 10% to FY23 sales; even at the lowest end (11% of sales), this implies around a 40% YoY decline in Meta's sales with Arista. Although risks persist for Meta's H2 results and AI capex's impact on conventional networking spending, Arista's aim for double-digit growth in FY24 suggests that prior growth concerns were overly cautious.
Analysts said Arista is still the best house in the networking neighborhood. "With ~40%+ mix of cloud customers, vs peers CSCO (MSDs) and JNPR (~25%), and strength in the data center switch market (2nd largest vendor, 5% share gain in 2022), Arista is positioned to benefit as the Gen AI opportunity grows to somewhere between $2B and $5B in the next three to five years," they noted.
The firm is raising FY24/25 EPS 10%/12% to reflect modestly stronger mid-teens topline growth and margin expansion.