Introduction
Founding of the company
Andy Bechtolsheim and David Cheriton co-founded Granite Systems in 1995, which was eventually sold to Cisco in 1996. In 2001, Cheliton and Bettlesheim founded another startup, Kealia, which was acquired by Oracle Systems in 2004.
Cheliton and Bertolsheim held executive positions at Cisco Systems from 1996 to 2003, co-leading the Catalyst product line with Kenneth Duda, Granite Systems’ first employee. In 2004, the three of them founded Arastra, which was later renamed Arista.
Company profile
Arista Networks (ticker: ANET) is a leader in high-performance network solutions. The company specializes in data center switches and routers that deliver lightning-fast speeds, low latency, and unparalleled scalability.
The rise of the company
Core technologies
Arista’s core main technology, EOS, is Arista’s network operating system. It is an independent image that can run on all Arista devices and virtual machines. EOS executes on an unmodified Linux kernel through a Fedora-based userspace and typically has more than 100 independent processes, called agents. These agents are responsible for controlling various features and functions of the switch.
In short, Arista’s scalable operating system enhances the automation, scalability and security of network operations, while allowing seamless integration with third-party software, which is the main reason why it is different and can stand out in the industry. .
Company edge
Arista Networks’ technology and infrastructure are critical to developing and deploying advanced AI applications. The combination of its CloudVision platform and EOS cloud operating system is critical to supporting AI workloads that often involve transmitting and processing large data sets.
Why is it so popular?
Due to the growing market demand for cloud artificial intelligence network solutions in the past two years, the main factor driving the company’s performance in recent years has been the growing demand for AI network solutions that connect cloud and data center infrastructure.
The company continues to benefit from growing demand for cloud AI networking solutions, such as Ethernet switches and routers, that connect cloud and data center infrastructure to power the technology.
Switch Industry Overview
How big is the market?
It is estimated that there are approximately 7,999 data centers worldwide. About 30% of them are in the United States.
Leading vendors
The companies that dominate the data center switch field are as follows: Cisco, Arista, NEC, Huawei, Juniper Networks, Hewlett Packard Enterprise, Dell, Extreme Networks, D-Link, ZTE, etc.
Market share
Arista’s market share in the data center switch market has increased rapidly, from 3.5% in 2012 to 18.8% in the second quarter of 2019, according to the Crehan Research Data Center Switch Market Share Report.
Company operation
Operating performance
In fiscal 2023, Arista posted record operating income, earnings, and free cash flow. Demand for Arista’s products remains strong, and its operating profits have expanded significantly over the past decade. As AI workloads become more complex in terms of network connectivity, Arista is well-positioned to address these bottlenecks.
Performance in Q1 2024
First-quarter revenue rose 16.3% to $1.57 billion, and adjusted earnings per share rose 39.2% to $1.99. Both figures beat analysts’ expectations.
Revenue guidance was also stronger than expected at $1.62 billion to $1.65 billion, which would favor midpoint quarter-over-quarter growth of 3.8%, up from the 2% quarter-over-quarter growth reported in the first quarter and equivalent to an annualized growth rate of 16.2% .
Outlook
Perhaps most importantly, management remains confident about the company’s opportunities in artificial intelligence. During its Q1 2024 earnings conference call, it highlighted a recent artificial intelligence training cluster in which Ethernet-based switches were paired with InfiniBand competitor technology from AI leader NVDA (ticker: NVDA) In comparison, its work completion rate increased by 10%.
Customers
Mega customers dominated
The internal infrastructure of artificial intelligence hyperscale companies such as Microsoft (ticker: MSFT), Meta Platforms (ticker: META), Amazon (ticker: AMZN) and Alphabet (tickers: GOOG and GOOGL) relies heavily on Arista’s network .
Risks
Arista’s two largest customers are technology giants Microsoft and Meta Platforms. About 40% of Arista’s revenue comes from these two companies. This is a very big risk and investors should be careful.
In the past, there were too many companies that were too concentrated on one or two customers, and their business suddenly stopped, causing the company’s revenue to be severely hit, and the stock price to collapse.
Customer capital expenditures continue to increase
Both Microsoft and Meta have announced that they will increase capital expenditures again next year. Wall Street expects this capital expenditure growth to accelerate as spending on AI infrastructure increases.
Competitors
Top rivals
Arista’s main competitors include Cisco (tickere: CSCO), IBM (ticker: IBM), Hewlett Packard Enterprise (ticker: HPE), which acquired Juniper, Broadcom (ticker: AVGO), Huawei, etc. Among them, Cisco is particularly important.
Since the establishment of Arista, Cisco has continued to press hard on Arista step by step. It has launched a comprehensive attack on patents, laws, and marketing. The tactics are exactly the same as the intimidation tactics Cisco used against Huawei twenty or thirty years ago. But it turns out that after thirty years, Huawei and Cisco are no longer rivals of the same magnitude. At present, it seems that Cisco’s various methods of attacking Arista are of no use at all.
Other competitors
In the Ethernet and switch market, there are Taiwan’s Accton and Broadcom, two white-label companies that have been working in this field for a long time. Among them, Broadcom is especially a heavyweight manufacturer. Please see my post of “The reasons behind Broadcom share price consistantly outperformance“
Potential competitors
Not only are there concerns about competition between InfiniBand and more standard Ethernet technologies, but in April 2024, analysts downgraded Arista due to concerns that Nvidia would also start producing its own Ethernet switches. device.
Nvidia not only makes data center GPUs for artificial intelligence (AI), but another key to its success is InfiniBand, which it acquired when it merged with Mellanox in early 2020. In addition to InfiniBand networking technology that helps simplify the adoption of the latest and greatest AI hardware, Nvidia also acquired some Ethernet technology from Mellanox.
This is exactly why Nvidia’s recent shift in focus towards Ethernet has made the market a little nervous. The company’s Spectrum-X Ethernet platform hopes to build on InfiniBand’s early success and become a more direct competitor to Arista for its data center customers. Arista’s top customers include Microsoft, Meta, major financial institutions and other large enterprises.
However, Arista management pointed out in a conference call with analysts during the first quarter of 2024 earnings release: We don’t see Nvidia as a direct competitor in Ethernet yet. I think it’s 1% of their business. This is 100% our business. So we don’t have to worry about this overlap at all.
Arista and the latest technology
Super Ethernet Alliance
In July 2023, the Linux Foundation announced that it would oversee the establishment of a Super Ethernet Alliance. The founding members of the alliance include AMD, Arista, Broadcom, Cisco, Eviden, HPE, Intel, Meta and the support of Microsoft.
The Super Ethernet Alliance said it is committed to improving Ethernet to meet the low latency and scalability requirements required for high-performance computing and artificial intelligence systems.
Arista says it still has advantages
During Arista’s earnings call in February this year, the CEO explained the difference between InfiniBand and Ethernet: “As you know, historically, InfiniBand and Ethernet have had their own advantages when considered separately. .Comparing these technologies in a real-world environment, Ethernet’s task completion time is approximately 10% faster.
It’s still hard to say who will win.
In the network market, Arista is undoubtedly still a very weak company. Compared with NVIDIA InfiniBand’s revenue of billions of dollars, it will be difficult to challenge it in the short term. However, the giants are dissatisfied with the monopoly of AI cluster networks, allowing Arista to gain A valuable opportunity for rapid development. Over time, it is likely to become Nvidia’s new major concern.
Capital market performance
Stock price rises astonishingly
It rose by 94.04% in one year in 2023, and by 26% in 2024 as of May 8.
Valuation
Arista trades at a whopping 39 times 2024 earnings estimates, which certainly isn’t cheap. But if the company can continue to earn a return on equity (ROE) of 35% as it currently does, and its expected earnings growth of 19% over the next five years can be achieved, then it won’t cost much.
Risk
However, Nvidia’s potential to enter the Ethernet switching space is certainly worth watching. There doesn’t seem to be much of a threat right now, but that may change in the coming seasons.
Stock split
Arista has conducted a four-for-one stock split in November 2021 and December 2024. The company has conducted a four-for-one stock split twice so far.
Repurchase
Arista has purchased $2 billion worth of common stock to date.
At the Q1 2024 earnings conference, the company also added an additional share repurchase plan, authorizing the repurchase of an additional $1.2 billion worth of shares.
Strong balance sheet
Arista has $5.45 billion in cash and no debt, giving a net cash position of $5.45 billions. Priced At 26x operating profits. In terms of company financial side. there is no major weaknesses identified for Arista.
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