Arista Networks surges 11% after Q3 report 📈 Strong AI and cloud sector

Shares of Arista Networks (ANET.US) are trading at double-digit highs today in response to the company's Q3 financial results and guidance, which soundly beat Wall Street forecasts. Primariliy the net income was very strong and earnigs per share surged. The company is under Wall Street's magnifying glass because of its rapid growth and business model, which positions it as a beneficiary of the broader AI trend - Arista's revenues are based on network services and software and infrastructure for databases, which are seeing growth and transformation in an environment of competition for the computing power needed to augment the capabilities of machine learning algorithms.

Recently, the market was unsure whether the company would actually defend itself with the report, and priced the risk on the downside of declining revenues due to Mata Platforms' (META.US) lower investment budget for 2024. In the end, Arista's Q3 report performed spectacularly, and Morgan Stanley decided to raise its rating for the company to 'Overweight' due to excellent results from its database, cloud and AI business:

Revenues: $1.509 billion (3.5% increase q/q and 28.3% increase y/y)

Earnings per share (EPS): $1.83 vs. $1.58 forecast and $1.25 in Q3 2022 ($581 million net vs. $391 million in Q3 2022).

Gross margin: 62.4% vs. 60.6% in Q2 2023 and 60.3% in Q3 2022.

• The market was uncertain about the company's report and guidance as one of its major clients Meta Platforms shared a rather conservative investment estimate for next year
• The results showed that everything related to AI and network infrastructure has a real impact on profitability and the net result. Arista's solutions can make it easier for companies to handle AI workloads
• Yesterday, the company indicated that technology giant Oracle (ORCL.US) has become one of its new customers. In its Q3 report, Arista announced that it had secured a new agreement with Spark, a telecom cloud networking provider whose data centers it will operate.
• Arista, along with the founders of the Ultra Ethernet consortium, has embarked on a mission to enhance Ethernet capabilities due to the growing needs of AI and HPC. Arista's solutions are gaining popularity primarily among large companies, government agencies and institutions.
• Morgan Stanley indicated that it was unsure of Arista's valuation due to its high valuation but stressed that it sees the company as a key player routnforming the network transition towards Ethernet in the face of the AI revolution. 
• Based on Arista's comments, Jefferies analysts estimate that Oracle currently accounts for about 5% of Arista's revenue, and expect the company to see increased collusion from Alphabet (GOOGLUS).

Arista CEO Jayshree Ulal indicated that the company's performance was very strong in both the cloud and AI sectors. The company now estimates annual revenue growth of 33% compared to 25% previously. The CEO also projects that in the future, the Cloud and AI Titan sector will account for more than 40% of the total revenue mix due to companies' growing investments in artificial intelligence. 

Arista forecasts above projections

For the fourth quarter of 2023, Arista expects revenues between $1.5 billion and $1.55 billion (estimated $1.47 billion), gross margins of 63% and operating margins around 42% (expected 41.4%). The results indicate the company's continued strength in the cloud and network sector - despite some investment caution on the part of companies, Arista managed to improve gross margins by 2% on a k/k basis. Wall Street. Not only MS but KeyBanc analysts also raised their target price for Arista's shares to $232 per share, highlighting the company's ability to increase market share with its unique enterprise technology products such as Arista Validated Design (AVD).

Arista Networks (ANET.US) shares, D1 interval. Source: xStation5