The Market Is Underestimating This Industry-Leading Stock

Arista Networks is a market leader that continues to increase its share. The wide-moat networking equipment maker maintains great margins and cash flow, too. Artificial intelligence infrastructure spending is supporting robust networking demand, which we expect to benefit Arista over the next several years. Yet supply constraints and conservative management guidance have damped enthusiasm for the stock this year. We prefer to focus on the long-term growth trend, which is highly positive. And we think the stock, which has traded at a premium in the past, looks attractive today at a modest discount to fair value. Arista was one of Morningstar senior technology analyst Will Kerwin’s stock picks on a recent episode of The Morning Filter podcast.

We view Arista Networks as the technology leader in high-speed switching for enterprise networking. We expect it to maintain its high market share at the highest speeds and augment its share in lower speeds and campus applications, where it has historically been less present. In our view, Arista’s software gives it a structural and durable competitive advantage over competitors in winning new customers, both in the cloud and in the enterprise. We believe Arista will see durably high growth from surging AI spending, with its strong position in high-speed switching making it a meaningful beneficiary. We expect AI to be a primary driver for the company over the next five years.

Key Morningstar Metrics for Arista

• Fair Value Estimate
  : $190
• Star Rating
  : 3 Stars
• Economic Moat Rating
  : Wide
• Uncertainty Rating
  : High

Economic Moat Rating

We believe Arista has a wide economic moat based on intangible assets and switching costs. We view Arista’s high-speed switches and software-led approach as significantly differentiated from other networking competitors and very difficult to replicate. Arista’s networking switches for high-speed applications are best of breed, in our view. Arista’s extensible operating system sets it apart from Cisco CSCO and other networking players, in our view. Arista’s proprietary software and hardware configurations require training and certifications, requiring weeks of class, hours of testing, and thousands of dollars. Furthermore, networking setups take months to implement and years to optimize.

Read more about Arista’s moat rating.

Fair Value Estimate for Arista Stock

Our $190 fair value estimate implies a 2026 enterprise value/sales multiple of 20 times and a 2026 adjusted price/earnings multiple of 52 times. We forecast a 22% compound annual growth rate for sales through 2030. Sales into data centers are the biggest contributor to revenue over our forecast, and we model a 24% CAGR here. We expect Arista to outperform its 2026 target of $3.25 billion in total AI revenue. We have the firm’s campus revenue increasing 19% annually through 2030 in our model. We forecast non-GAAP gross margin to remain in Arista’s target range of 62%-64%. We model non-GAAP operating margin to remain in the high 40s through 2030.

Read more about Arista’s fair value estimate.

Risk and Uncertainty

Arista’s sales are concentrated in the cloud networking market, which can exhibit cyclicality and lumpy spending patterns. This can be exacerbated by Arista’s concentration in customers like Microsoft MSFT and Meta Platforms META. Arista is working to expand its presence in on-premises data centers and campus environments. We think its effort to penetrate these markets creates uncertainty. Arista breached the cloud market with cutting-edge high-speed performance, but it may struggle to match the comprehensive portfolio of Cisco—which includes cybersecurity and collaboration software—for smaller customers and campus environments. If it is unable to successfully make inroads, its performance could suffer.

Read more about Arista’s risk and uncertainty.

Arista Bulls Say

• Arista has gained top market share in high-speed switching thanks to its technology leadership, and it continues to gain share.
• Best-in-class profit margins and robust economic profits reflect the company’s strong value proposition and wide economic moat.
• Arista earns heady free cash flow, which it can use for organic investment and shareholder returns.

Arista Bears Say

• Arista has a weaker position in areas of networking outside high-speed switching and may struggle to expand into adjacent markets.
• We see more competition for Arista in generative AI spending, with Nvidia NVDA holding a large incumbency via bundles of its proprietary networking equipment with its graphics processing units.
• Arista’s record of acquisitions is short. The company could destroy shareholder value with an ill-advised deal.