New Arista Networks Price Target After Beat-And-Raise Quarter

Following Tuesday night’s beat-and-raise quarter from Arista Networks (ANET), we are lifting our ANET price target to $240 from $225 given the clarity on 2027 brought about by management’s initial guidance that was well ahead of market expectations.

That offers nearly 30% upside from current share price levels, which have moved up more than 10% in early trading on Wednesday following Tuesday night’s results. That is giving us fuel to lift our rating on ANET shares to One from Two.

As we explained in our trade alert earlier on Wednesday, we are not inclined to pick up more shares for the Portfolio given the influence of Wednesday’s post-earnings pop in the shares and what that has done for the Portfolio’s ANET position size. However, for folks that may look to acquire more ANET shares, better prices are likely to be had as the influence of short covering fades. Heading into Tuesday night’s report more than 12 million shares were short, which equates to just over two days to cover. For the Portfolio, should our position size drift back to around 3.5% or so, we may be inclined to add a modest number of additional shares, topping off our holdings.

On the topic of the midterm election outcome, so far, the narrative appears to be leaning toward slower permits and higher costs, but not a shutdown. Our view has been that much like cell towers, folks do not want data centers near them, but they also won’t compromise on their use of AI, streaming and others supported by data centers just like they wouldn’t compromise on cell phone or smartphone coverage. It’s very early days but we’ll continue to monitor developments on this front and adjust our thinking on what could happen as policy developments emerge.

Now, let’s get into Arista’s quarterly results and outlook.

Q3 Results vs Consensus

Arista Networks delivered a clean beat on every line in the September quarter. Revenue rose 58.5% year over year and 20.5% sequentially to $3.66 billion, the fastest growth since its IPO, topping both the $3.33 billion consensus and the company’s own $3.3 billion guidance. Non-GAAP EPS of $1.20 rose 56% from $0.77 a year ago and beat the $1.08 consensus by $0.12, clearing the $1.06 to $1.08 range Arista guided to in August.

Profitability also landed at or above the top of guidance. Non-GAAP gross margin was 64.0%, ahead of the roughly 63% guide and up from 63.4% in Q2. Arista generated about $1.2 billion in operating cash flow and ended the quarter with $14.4 billion in cash and marketable securities and no debt.

Gross margin improved 60 basis points sequentially on customer mix but fell 120 basis points year over year as product cost inflation outpaced supply chain efficiencies. Q2’s gross margin had also been helped by tariff refunds. Management is holding its gross margin range at 62% to 64% for both Q4 and 2027 and said it sees no change from future scale-up products.

Industry-wide component shortages remain a key constraint, making supply chain execution critical. During the earnings call, management shared that purchase commitments rose to $11.4 billion from $9.7 billion at the end of Q2, roughly triple the $3.6 billion of a year ago, and now include a multi-year memory agreement. Those commitments are expected to climb further when the current quarter is reported. We saw similar moves earlier this year with other aspects of AI infrastructure, and in our view, this points to the continued demand to come, especially as key customers Microsoft (MSFT) and Meta (META) step up their planned capex spend next year.

In that regard, Arista management shared that supply has been secured to support the 2027 forecast across silicon, memory and other components, though not every order has been placed. We see that supporting recent comments about 2027 chip demand from Nvidia (NVDA) and AMD (AMD) but also known Arista networking chip supplier Broadcom (AVGO).

Exiting the quarter, Arista’s deferred revenue totaled $6.8 billion and management cited that flat sequential figure to the company ramping new products with customers, which in the past has made deferred revenue lumpy quarter to quarter. Fair enough, but if we do not see a step up in deferred revenue when Arista reports the current quarter, that will raise questions about its 2027 revenue outlook mentioned above and again below.

Management’s Outlook

Arista’s Q4 outlook came in well ahead of expectations. It guided revenue to $3.9 billion to $4.0 billion, versus the $3.6 billion FactSet consensus, and non-GAAP EPS to $1.26 to $1.30, versus the $1.15 consensus, with gross margin of 63% to 64% and operating margin of 48% to 49%. That lifts 2026 revenue guidance for the fourth time this year, to just over $13.3 billion, or 48% growth, from $12.6 billion in August. That compares with Visible Alpha’s pre-report consensus of $12.68 billion, and the implied full-year non-GAAP EPS of $4.35 to $4.39 sits well above the $4.12 consensus.

Arista also gave a first look at 2027 forecasting revenue growth of 38% to 40% to about $18.5 billion, gross margin of 62% to 64% and operating margin of about 49%. Within that, AI networking revenue is expected to double to about $7 billion from the 2026 target of $3.5 billion, and campus revenue to grow about 60% to roughly $2 billion from $1.25 billion. That new 2027 revenue outlook is roughly $2.3 billion, or 15%, above Visible Alpha’s pre-report 2027 consensus of $16.15 billion, while the 2027 margin targets are in line with the roughly 63% gross margin. When we look at some of the changes starting to flow through as Wall Street adjusts their bottom-line figures, they are looking more like $5.90 compared to the pre-earnings report figure around $5.20

What’s Driving the Demand?

AI remains the main engine, and management described the industry as shifting from compute-centric to network-centric designs. Arista now has more than 100 Etherlink AI customers and expects more than 10 gigawatts of deployments across 10 or more types of AI accelerators by the end of 2027. Microsoft and Meta remain 10%-plus customers, and Arista expects to add at least one, possibly two more this year, depending on how much product it can ship by the end of the year.

Enterprise and campus: COO Todd Nightingale described “phenomenal growth” in enterprise, driven by customers treating campus and branch networks as mission critical. Management also alluded to AI-powered cyberattacks, which keep us bullish on the Portfolio’s First Trust Nasdaq Cybersecurity ETF (CIBR) holding, are adding urgency.

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At the time of publication, TheStreet Pro Portfolio was long ANET, CIBR, NVDA, AVGO, AMD, MSFT and META.