ANET - Arista Networks: AI-Induced Rally Creates Risk

2024-07-09 09:57:51 ET

Summary

• Arista Networks is seeing robust free cash flow and revenue growth driven by demand for networking solutions in the AI computing era.
• The company has partnered with Nvidia to improve AI cluster efficiency, and could benefit from growth in the AI hardware market.
• Despite positive momentum, Arista Networks' lofty valuation, with a P/E ratio above 40.0X, poses considerable correction risks for investors.

Arista Networks ( ANET ) has seen a massive increase in valuation over the course of the last three years. The company’s networking solutions for data centers are in high demand as companies spend fortunes on getting ready for a new AI-defined computing era. As a result, Arista Networks’ revenues and free cash flows have surged, driving a major share price rally. While the outlook is favorable given the ramp in AI-related hardware spending (AI server infrastructure, semiconductors and high-bandwidth memory), Arista Networks is trading at a very lofty valuation and has considerable correction risks, in my opinion. With a P/E ratio north of 40.0X, the company’s valuation appears decoupled from its historical valuation, which is why I rate shares of Arista Networks a sell!...

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