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Arista Networks Q4 2023 earnings upcoming 📊 Will AI drive it again? 📈

15:41 12 February 2024

After today's US trading session, cloud networking solutions provider Arista Network (ANET.US) will release its Q4 2023 results. Investors will pay attention to 2024 outlook of the company, which, over the course of recent quarters, has been rightly recognized by Wall Street as one of the beneficiaries of the development of AI technology. 

In addition, rival Cisco Systems (CSCO.US), which the market sees as a company whose expansion will slow, losing market share to Arista, will report on Wednesday. Will results and forecasts confirm a dynamic growth environment, supported by cloud networking switches and product innovation? A recent excellent report from Arista's largest customer, Meta Platforms (META.US), should support investor sentiment.

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  • Revenues: $1.54 billion vs. $1.51 billion in Q3 2023
  • Earnings per share (adjusted): $1.71 vs. $1.72 in Q3 2023 and $1.41 in Q4 2022

Are expectations high?

  • Management last quarter estimated quarterly revenue of $1.50 billion to $1.55 billion in Q4 (a 19.6% increase from $1.28 billion, a year earlier). Analysts have already priced this in, predicting that revenue will approach the top line of forecasts, with expectations of $1.54 billion (20.7% y/y).
  • Wall Street expects net income to increase, from $427 million in Q4 2022 to $486 million in Q4 2023 In the first three quarters of 2023, Arista Networks reported net income of $1.47 billion, compared to $925.4 million in 2022 Cash flow from operations more than tripled from $452 million to $1.5 billion.
  • Management 'conservatively' estimated operating margin (non-GAAP) at around 42% in the previous quarter, compared to 42.6% last year. That would mean roughly $1.61 per share in adjusted earnings (a result below forecasts). So, Wall Street wants to see more, rather than 'just' a report worthy of the forecast. Attention will also shift to guidance. Are there justified conditions for optimism?

A brighter future - will the Meta help?

Revenues and profits from cloud computing digital giants like Azure, Google Cloud and AWS have performed well y/y, and if we consider that Arista will remain in the sector as one of the main beneficiaries of demand for increasingly modern cloud solutions (EOS system), this leads us to conclude that the very strong sector, coupled with demand for data center (AI) solutions, and optimism around technology companies should support its core business and stock price. 

  • Significant investments made in data centers, including by its largest customer Meta Platforms (META.US) accounted for 26% of Arista's total revenue. Meta announced that it plans to spend between $30 billion and $37 billion on digital infrastructure in 2024. That's $2 billion more than what it had previously projected, for the current year. 
  • Other large companies are also spending more, which Arista Networks will benefit from, as we have already seen in 2023. Revenues in the first nine months of 2023 amounted to $4.32 billion. That's nearly 40% more than the $3.11 billion generated in the first three quarters of 2022, with most of the growth coming from sales of switching and routing products and network applications (above);
  • Arista Networks in November reported better-than-expected third-quarter financial results, issuing revenue guidance for the fourth quarter above forecasts. Any negative disappointment in revenue or earnings could create a downward reaction this time around, given that the stock is currently at historical highs.

Is Arista too expensive?

However, the growth environment still seems very favorable, even more so if we consider that Arista's switches will enjoy a competitive advantage over Cisco (whose valuation has been much lower recently). The biggest concern about Arista's shares may certainly be their valuation, as those with meaningful revenue growth, high quality management, no debt and gross margins above 60% are already priced at a significant premium and reflect investors optimism. However, a future is the key. Looking at higher spending on Meta's infrastructure, the environment for growth is clear, the question remains how strong revenues' growth will be? Last time, TSMC (TSM.US) CEO indicated that the observed AI trend is just on top of the iceberg. 

Arista Networks (ANET.US) on the D1 intervalSource: xStation5


Source: XTB Research

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