Arista Networks Faces Caution from Analyst on Network Infrastructure Spending

Shares of Arista Networks (ticker: ANET) dipped after Piper Sandler analyst James Fish expressed concerns regarding network infrastructure spending.

Recent Downgrade

In a note on Wednesday, Fish downgraded Arista from Overweight to Neutral, while maintaining a price target of $190. As a result, Arista's stock saw a decline of 4.2%, currently sitting at $186.51. Despite this drop, the stock has still experienced a substantial 54% increase this year.

Key Customers

Arista Networks is known for its networking hardware, which is used by major companies such as Microsoft (MSFT) and Meta Platforms (META). The downgrade issued by Fish stems from worries about the overall networking spend in 2024 by both enterprise and cloud customers. He suggests that the risk-reward scenario for investors is becoming more balanced after the surge in stock price this year.

Positive Outlook for Q3 Results

While Fish remains cautious about the future, he still expects Arista to report third-quarter results above Wall Street's consensus levels. He continues to view the company as a "secular winner in a cyclical space," providing investors with significant exposure to increased spending in areas such as artificial intelligence workloads.

Concerns About Valuation

Fish also points out that Arista's stock price is currently trading well above its historic average valuation. He believes that the stock price already incorporates double-digit growth estimates for 2024, despite concerns about cloud digestion, limited visibility, and enterprise budget constraints.

Potential Challenges in the Enterprise Segment

The surge in enterprise spending that has contributed to Arista's success may not be sustainable in 2024, according to Fish. Customers may choose to extend the useful life of their networking hardware, particularly switches, due to IT budget pressures. This segment is at risk of declining spending.

Cloud Companies in Digestion Mode

Fish notes that the networking sector benefited from a "backlog flush" this year following a shortage of parts during the pandemic. However, he anticipates that cloud companies will enter a phase of digestion in 2024 as they absorb the influx of recent shipments.

Looking Ahead

While Fish acknowledges Arista's potential for double-digit growth in the long run, he suggests that achieving this in 2024 may be challenging without changes in the business environment or an uptick in artificial intelligence adoption.