This data center play has been a star performer over the past couple of years and shows no signs of slowing.
The Nasdaq Composite has been on an epic run over the past couple of years, driven higher by the recovering economy, the rapid adoption of artificial intelligence (AI), an undisputed U.S. Presidential election, and two recent interest rate cuts by the Federal Reserve Bank. After the tech-centric index surged 43% in 2023, it’s up roughly 34% so far this year (as of this writing). History suggests there’s still upside as we head into 2025.
Records shows the current bull market kicked off on Oct. 12, 2022. While each rally has its own nuances, history can help provide perspective. Bull markets tend to run more than five years, on average. Given the current rally just passed its second anniversary, it will likely continue its ascent into 2025. Furthermore, in years following gains of 30% or more, the Nasdaq has climbed an additional 19%, on average, so history is squarely on the side of investors.
Adding fuel to the fire has been a resurgence in the popularity of stock splits. This renewed interest is prompting investors to take a fresh look at companies that decide to split their shares, as this is generally preceded by a history of robust revenue and earnings growth. One such company is Arista Networks (ANET 0.93%). The stock has gained 2,590% over the past decade and 92% over the past year (as of this writing), which prompted a 4-for-1 forward stock split that was completed earlier this month.
Despite its recent run-up, there’s reason to believe that Arista’s growth spurt will continue into 2025. Read on to find out why.
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A crucial provider to AI data centers
Arista Networks provides a broad cross-section of routers, switches, and other networking equipment that underpins the data flow in servers, data centers, and networks.
The advent of AI has shined a spotlight on this underappreciated part of the equation. As a result, there’s been a mad dash to upgrade data centers to meet the rigorous demands of AI and keep the data moving through the ether at peak efficiency. Arista has released a number of AI-centric Ethernet products designed to do just that, and the demand for these pioneering products continues to accelerate.
Bank of America believes data center demand will continue at a brisk clip, growing at a compound annual growth rate of 50% over the next three years. This, in turn, will accelerate demand for the crucial components supplied by Arista Networks.
The company’s products are without equal for AI data center applications. Earlier this year, Arista Networks was recognized as a Visionary in Gartner‘s Magic Quadrant. The company was highlighted for offering network management tools that simplify operations, providing a differentiated network security strategy, and enhancing machine learning and advanced AI capabilities. Arista was also selected as a Customer’s Choice in Gartner’s Peer Insights, which is awarded based on recommendations from existing customers.
The numbers tell a tale
That ongoing demand is having a positive impact on the company’s financial results. For the third quarter, Arista generated revenue that grew 20% year over year to $1.8 billion while also increasing 7% sequentially. This resulted in earnings per share (EPS) of $2.33, an increase of 35%. The results sailed past management’s guidance and Wall Street’s consensus estimates.
Perhaps more telling, management raised its outlook. For the fourth quarter, Arista is guiding for revenue of $1.9 billion, which would represent year-over-year revenue growth of 23%.
Wall Street is equally bullish, calling for revenue growth of 19% this year and next. Furthermore, of the 26 analysts who have offered an opinion in December, 77% rate the stock a buy or strong buy.
Is the stock a buy?
Arista Networks has a compelling track record of growth and a ringing endorsement from Wall Street, so what’s not to like?
I’d be remiss if I didn’t address the elephant in the room, namely the stock’s lofty valuation. Arista Networks is currently selling for 54 times earnings, which is certainly frothy. Even its price/earnings-to-growth (PEG) ratio, which factors in its accelerating growth, comes in at 1.4 when any number less than 1 is the benchmark for an undervalued stock. So, there’s no denying its premium valuation.
That said, sometimes it’s worth paying up for quality. Arista Networks has outperformed the broader market by a wide margin over the past five years, delivering gains of 808%, roughly nine times the return of the S&P 500. It stands to continue its growth streak, fueled by the growing demand for AI.
When viewed through that lens, I’d suggest Arista Networks is a buy.
Bank of America is an advertising partner of Motley Fool Money. Danny Vena has positions in Arista Networks. The Motley Fool has positions in and recommends Arista Networks and Bank of America. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
