As prominent tech firms continue investing in AI infrastructure, Arista Networks (ANET, Financial) is reaping significant benefits. The company reported another strong quarter with impressive top and bottom-line results in Q2. Arista Networks, a provider of cloud networking systems for large data centers, campuses, and routing environments, counts Meta Platforms (META, Financial) and Microsoft (MSFT, Financial) as its two largest customers, contributing around 39% of its FY23 revenues. With the increasing need for high-speed switching to support AI workloads, ANET is gaining momentum.
Despite experiencing a roughly 15% correction from July highs before its Q2 results, this had little to do with AI. Several companies have noted the robust AI landscape, with major chip companies like Taiwan Semi (TSM, Financial) increasing their AI-related revenue forecasts. Given the ongoing AI frenzy, ANET stands to benefit significantly, especially if META and MSFT continue to expand their CapEx for AI infrastructure.
- In Q2, ANET posted adjusted EPS of $2.10, surpassing estimates by double digits, on revenues of $1.69 billion—a 15.9% year-over-year increase, exceeding the company's 11-13% forecast. Growth came from all three sectors: cloud, enterprise, and providers. Most of ANET's strength came from the Americas at 81%, with International comprising the rest. Management noted some relative weakness in the APJ region.
- Customers are responding positively to ANET's product suite. During its Q2 call, the company highlighted several notable customer wins, including a Tier 2 cloud provider like IBM or Oracle, investing aggressively in AI GPUs. ANET was chosen for its ability to solve performance and scale issues with AI applications. Such examples underscore ANET's long-term revenue acceleration potential as customers turn to network providers to maximize AI capabilities.
- ANET delivered strong Q2 numbers without compromising margins. The company expanded its gross margins by 410 basis points year-over-year and 120 basis points sequentially to 65.4%, above its 64.0% prediction.
- Looking ahead, ANET provided somewhat conservative guidance, projecting Q3 revenues of $1.72-1.75 billion, or about 15% year-over-year growth at the midpoint, indicating a further deceleration from previous quarters. For the year, ANET expects revenues to climb by at least 14%, slightly below analyst forecasts. However, investors are not overly concerned, as ANET tends to guide prudently. Management expressed confidence that 2025 will be a significant growth year.
Aside from conservative guidance, ANET's Q2 report was solid. The spending on AI infrastructure remains strong, providing a powerful tailwind for ANET, which is expected to intensify by 2025.
