Supply Constraints Weigh on Shares of This Holding

Last night, Pro Portfolio holding Arista Networks (ANET) delivered a beat-and-raise quarter, with Q1 2026 revenue up 35%, year over year, and revenue for the current quarter expected to be up more than 26%. Similar to how Costco (COST) is lapping tough comparisons, so too is Arista given the 30% top-line increase posted in Q2 2025.

Viewed through the lens of the 77% year-over-year increase in combined hyperscaler capex for 2026 compared to 2025, demand is soaring. Exiting Q1 2026, Arista’s total deferred revenue balance was $6.2 billion, up from $5.37 billion at the end of 2025 and up ~100% compared to Q1 2025.

However, as we touched on in our opening comments, supply chain constraints for power and networking are restraining the ability to convert booked business and incoming demand into revenue. That overshadowed wins discussed during last night’s Arista earnings call as well management noting the company now has more than 100 cumulative customers to date in 800 gigabit Ethernet deployments, and 1.6 terabit at production scale is slated for next year.

The comment on the earnings call that crystalized this and is weighing on ANET shares is this one from Chairman and CEO Jayshree Ullal:

"Clearly, our demand is outstripping our supply this year. While we hope the supply chain will ease in the next year or 2, the Arista operations team has been diligently engaging with our vendors in strengthening supply agreements and engaging in multiyear purchase commitments. We anticipate gross margin pressure due to mix and trade-offs we are making to pay more to assure supply continuity to our customers."

We’ve seen this before with Microsoft (MSFT) , Google’s (GOOGL) Google Cloud, and Amazon’s (AMZN) AWS – short-term challenges in converting backlog into booked revenue because of supply chain and capacity constraints. But as their supply chain constraints eased, their Q1 2026 revenue accelerated with Google Cloud up 63% year over year, Microsoft Azure up 40%, and AWS up 28%. However, with AI and data center demand remaining very strong they along with Meta (META) increased their capex levels and that likely means we are going to see periods of ramping revenue with slower ones mixed in as additional capacity comes on stream.

That’s what we likely going to see for Arista and others serving the AI and data center digital infrastructure buildout. It also explains why we’ve seen Meta and other companies look to tie up existing and oncoming supply chain capacity to meet their capex needs.

So, while the market is surprised by the admission by Arista despite reports of power constraints that are hobbling data center projects, we’ll play the long game. Helping take some of the sting out of the last 24 hours was our sale of ANET shares on April 17 at $163.71.

That sale and the fall in ANET shares, has our position size back around 3.0%, which means we have some room to add back shares. Glancing at the chart, the shares are grappling today with the 50-day moving average just below $145. They do, however, have much stronger support between $138-$139, which is where the 200-day and 100-day moving averages are. Given the gap we see in the chart that would be filled around $134, we’ll hold off for now and keep a close eye on ANET.

One other quick note about Arista’s Q1 2026. It closed the quarter with ~$12.35 billion in cash and equivalents, and ~818 million remaining on its current share repurchase authorization.

At the time of publication, TheStreet Pro Portfolio was long AMZN, ANET, GOOGL, META and MSFT.