Arista Networks Shows Strong Growth Engine in 2Q23, Fueled by Enterprise Demand Surge: Analysts

Keybanc analyst Thomas Blakey maintained Arista Networks Inc ANET with an Overweight and raised the price target from $206 to $217.

The re-rating reflected higher estimates post a beat and raised 2Q23 report. 

The price target represents a ~20% premium to the three-year historical NTM average multiple, which he views as warranted provided the company's expanding opportunity with both Cloud Titans, CSPs and Enterprise, including AI-related expansion long-term to Arista's addressable markets. 

Further, the analyst continues to view Enterprise as Arista's incremental growth engine, which he believes could rival the Cloud Titan segment in C2H23 in terms of percentage of revenue. 

The additive growth opportunities focused on Enterprise deserve a higher multiple, all else equal, provided a more diverse and dynamic addressable market going forward.

Needham analyst Alex Henderson maintained Arista Networks with a Buy and raised the price target from $195 to $200.

Arista executed strongly in 2Q23, demonstrating its "Best in Class" position, delivering 42% Product growth and overall revenues up 38%, coming 8% ahead of Street forecasts. 

Further, they raised the full-year Revenue growth outlook to 30% from 26%, with CY3Q Revenues up 23.2%-27.5% compared to Street estimates averaging 18%. 

EPS also benefited from gross margins and operating margins ahead of forecast, resulting in EPS up 46%, a solid 10% above Street estimates. The call focused on the longer-term AI opportunity and the Cloud spend but also called out the robust Enterprise results and continuing success. Henderson expects Arista's growth to decelerate, but he looks for the company to keep executing well and gaining share. As AI broadens, Arista is positioned as a critical supplier. He raised the topline and bottom-line estimates.

Henderson now expects CY23 revenue of $5.696 billion and EPS of $6.04, CY24 revenue of $6.327.2 billion and EPS of $6.55, and CY25 revenue of $7.113.8 billion and EPS of $7.20.

JMP Securities analyst Erik Suppiger reiterated Arista Networks with a Market Outperform and a $200 price target.

ANET exceeded 2Q24 estimates and guided for FY23 growth of >30%, up from previous guidance for >25%, thanks to robust enterprise demand, which was particularly strong in EMEA and APAC. 

Management indicated the company's enterprise momentum will continue to grow into 2024 unless the macro economy slows significantly. The increased contribution from enterprise accounts also benefits gross margins, which exceeded the analyst's estimate by 30 basis points.

Cloud titan deployments slowed in 2Q23 as management noted one of its two significant customers reduced capex spending. He believes the customer is Meta Platforms Inc META.

Supply chain constraints are likely to normalize by the end of 2023/early 2024, with lead times returning to 6 months, down from as much as a year for select products. The improved supply chain will likely cause gross margins to improve sequentially every quarter this year and stabilize next year.

Morgan Stanley analyst Meta Marshall maintained Arista Networks with an Equal-Weight and raised the price target from $150 to $185.

Marshall highlighted that ANET is optimistic about FY24 prospects, even on the meaningful Q2 beat/raised FY23 expectations and Cloud Titan digestion, as the business drivers are more diversified than in the past. 

She raised her price target on increased earnings estimates and would look opportunistic on any softness. 

Price Action: ANET shares closed higher by 19.70% at $185.61 on Tuesday.