A Full Analysis of Arista Networks ($ANET)

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Stock Pick: Arista Networks (ANET-US, $192B MCAP)

In the Data Center world there are three critical areas: The chips, the land and building, and the supporting infrastructure.

Data centers can’t wizz around information and do all that math unless the entire system is optimized.

Sure, Nvidia hogs the spotlight when it comes to their GPUs powering alot of AI. But there are quiet players, behind the scenes that are just as integral to operate these mammoth facilities.

While this company is not a household name - it should be.

I think we’re only in the 4th of 5th inning of this capex cycle as projections for data center spend continue to move up.

This company still has plenty of room to run.

• Why now? 👉 The Connective Tissue of Data Centers

• Overview 👉 What Does Arista Networks Do?

• Role in Ecosystem 👉 How they Fit into the Stack

• How Do They Win? 👉 Value Proposition

• Business Units 👉 Segment breakdown

• How Do They Make Money? 👉 Revenue Model

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

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Why now? 👉 The Connective Tissue of Data Centers

Arista Networks is at the heart of today’s digital infrastructure. The company just put up a massive quarter (more on this below). Wall Street cheered these results, seeing resilient demand for Arista’s data center switches driven by the growing footprint of data centers and surging AI-related spending by enterprises.

Arista finds itself propelled by several powerful tailwinds that reinforce its long-term growth narrative. The first and most headline-grabbing is the AI boom. The explosion of generative AI and large-scale machine learning is driving massive investments in AI infrastructure and not just in GPUs, but in the networks that connect those GPUs. Arista is capitalizing on this in a big way. Management has estimated that AI-specific networking could contribute at least $1.5 billion to Arista’s revenue in 2025 (about 17% of the total) and is likely to exceed that.

In an uncertain economy, Arista is viewed as a picks-and-shovels play powering the cloud with connective tissue that keeps data flowing, making it a crucial and arguably defensive tech franchise even if broader IT spending softens. So… why now? Because Arista sits at the nexus of several unstoppable trends (cloud services, generative AI, data growth), and it’s executing impressively on this opportunity. Its latest numbers underscore that Arista is not just riding the wave but helping build the ocean of our digital future.

Overview 👉 What Does Arista Networks Do?

Arista Networks is a leader in high-performance networking, best known for its ultra-fast Ethernet switches that connect thousands of servers inside cloud data centers. These switches act as “traffic cops,” directing data at blazing speeds (100G, 400G, 800G+) and run on Arista’s EOS operating system, prized for its programmability and stability. This pairing has made Arista the preferred choice for hyperscalers like Microsoft and Meta.

The company has expanded beyond data centers into routing and campus networking, all built on the EOS foundation. With 10,000+ customers worldwide, Arista has grown from its 2004 startup roots into a powerhouse rivaling Cisco. Today, it commands over 40% of the high-performance data center switching market, making its technology the backbone of modern cloud computing and the internet itself.

Role in Ecosystem 👉 How They Fit Into the Stack

In a modern cloud data center, Arista’s role is fundamental, with its switches acting as the circulatory system moving data between servers, storage, and external networks. Every time you stream video or run an AI model, that information is coursing through Arista switches in hyperscale centers. Top-of-Rack and spine switches form fabrics that interconnect tens of thousands of machines, enabling massive east-west data flows. Without this backbone, powerful servers and GPUs would be isolated islands.

Arista doesn’t operate consumer services or run data centers itself, it supplies the connective tissue to those that do. Microsoft Azure, Meta, Google, and major enterprises rely on its gear for private clouds and HPC clusters. Sitting between semiconductor suppliers (like Broadcom, which provides switching chipsets) and cloud applications, Arista adds value through system design and software.

Its role is growing with AI supercomputing: Arista connects GPUs into giant training clusters, helping customers shift from proprietary interconnects like InfiniBand to Ethernet. CEO Jayshree Ullal highlights that as AI clusters scale, both back-end and front-end networks must expand, areas Arista directly enables. Its broader “client-to-cloud” push aims to link campuses and branches to cloud data centers through new offerings in switching, Wi-Fi, and SD-WAN.

Arista is the silent enabler, keeping data flowing inside the cloud while increasingly unifying enterprise networks into one cloud-ready fabric.

How Do They Win? 👉 Value Proposition

Arista’s rise against larger competitors stems from a clear value proposition: best-in-class software on high-performance, industry-standard hardware. Unlike legacy giants reliant on proprietary designs, Arista embraced “merchant silicon” (chips from suppliers like Broadcom) paired with its EOS operating system. This gave it agility to adopt cutting-edge chips faster and cheaper, while pouring innovation into software. EOS is highly programmable, stable, and uniform across devices, drastically simplifying network management. A cloud operator can automate thousands of switches as if they were one, with real-time visibility and consistent features everywhere. This software-driven model lowers costs, speeds upgrades, and adds value beyond “white-box” hardware, even when based on similar chips. In an era where automated, scalable networking underpins the cloud, Arista’s mix of performance, simplicity, and reliability hits the sweet spot.

Another differentiator is Arista’s focus on cloud-era needs. It has consistently anticipated technology shifts, from early 100G and 400G Ethernet platforms to today’s 800G rollouts for AI workloads. EOS has evolved features for the modern demands of visibility and congestion control tailored for AI clusters, plus smart upgrade systems that can reroute traffic if a GPU node fails mid-training. These capabilities help Arista win not just on speeds and feeds, but on smarter, more resilient networking.

Even as some cloud giants test open-source operating systems, they continue to buy Arista gear for critical deployments, citing engineering quality and support. Recognized as a Leader in Gartner’s Magic Quadrant, Arista has become the best-of-breed specialist: not the cheapest, but the most performant and operationally efficient. Many customers have “decisively standardized” on Arista, proving its moat in a fiercely competitive market.

Business Units 👉 Segment Breakdown

Arista’s business spans three main segments. About 65% of revenue comes from core data center switching, the high-speed Ethernet gear (notably its 7000-series) that powers cloud data centers and increasingly AI clusters. This remains the engine of the company, driven by upgrades to 100G/400G/800G networks from cloud titans and large enterprises.

Network adjacencies, mainly routing and campus networking, contribute ~18% of revenue. This includes data center routers, campus Ethernet switches, Wi-Fi, and more recently SD-WAN from its VeloCloud acquisition. These offerings aim to extend Arista’s cloud-grade technology into enterprises and branch offices, challenging Cisco. Though smaller today, this segment is rising and was recognized in Gartner’s 2025 Magic Quadrant for Enterprise LAN.

Services and software subscriptions make up the remaining ~17%. This covers licenses, support contracts, and cloud-based platforms like CloudVision, providing recurring, high-margin revenue. Deferred revenue reached $2.8B by end-2024, underscoring long-term customer commitments and the stickiness of EOS and CloudVision.

By customer vertical, cloud titans (Microsoft, Meta, Amazon, Google, Oracle) still dominate, with Microsoft and Meta alone making up ~35% of 2024 revenue. Yet enterprise adoption is accelerating, with hundreds of Global 2000 customers and 25–30 “neocloud” and enterprise clients building AI networks. Management highlights strong momentum across both hyperscalers and enterprises. The company’s “Arista 2.0” strategy now emphasizes expanding campus, edge, and subscription software to diversify beyond its core cloud switching dominance.

How Do They Make Money? 👉 Revenue Model

Arista’s revenue model blends large hardware sales with recurring services. When cloud operators or enterprises expand their networks, they purchase Arista’s switches (roughly 80–85% of revenue), each running EOS software. Around these sales, Arista layers on high-margin subscriptions and support, such as its CloudVision portal or ongoing software updates. These are recognized as service revenue and drive a growing deferred revenue base, which reached $2.8B at the end of 2024, a signal of future demand and customer stickiness.

Arista makes money by selling top-tier networking gear at healthy prices, and by monetizing the software and services around that gear on an ongoing basis. This combo has resulted in a financial profile of rapid growth + high recurring revenue + strong margins, a trifecta that is relatively rare in hardware-centric companies.

As long as data center build-outs and upgrades continue, Arista stands to keep ringing up large product sales, and as its installed base grows, its stream of subscription and support revenue should grow in tandem (often at even higher margin). This leverage in the model is evident in Arista’s recent earnings. Revenue is growing double-digits and earnings are growing even faster, thanks to both scale and the tilt toward software/services. Few companies its size manage 30%+ growth while already delivering billions in profit.

By The Numbers 👉 Key Metrics

Revenue Growth: Arista’s momentum is remarkable. In Q2 2025, revenue reached $2.2B, up 30% year-over-year and 10% sequentially. That puts the company on pace for over $8.5B annually, versus $5.9B in 2024. Management raised 2025 guidance to $8.75B (+25% YoY), well above its initial outlook. Deferred revenue also climbed, signaling strong bookings.

Profitability: Growth is paired with elite margins. Q2 2025 gross margin was ~65%, with non-GAAP operating income topping $1B for the first time, yielding operating margins above 40%. EPS hit $0.73, up from $0.53 last year and beating consensus. GAAP net income was $889M, up 34%. Expenses grew far slower than revenue, so full-year operating margins are tracking ~46–47%. Arista sits among the most profitable firms in tech.

Cash & Balance Sheet: The company generated $3.7B in free cash flow in 2024 and ended with $8.3B in cash and no debt. This allows heavy R&D investment, strategic acquisitions like VeloCloud, and capital returns. Buybacks totaled $423M in 2024, and in May 2025 the board approved another $1.5B. Despite repurchases, cash keeps building.

Operational Metrics: Arista has delivered 20 straight quarters of sequential revenue growth, reflecting consistent execution. Customer concentration is easing: while Microsoft and Meta were ~35% of revenue in 2024, Oracle and enterprise clients are expanding the base. More than 1,000 customers use its 400G switches, with 800G deployments ramping in 2025, particularly for AI clusters. Market share in high-speed data center switching is above 40%, and its TAM now exceeds $50–70B across switching, routing, campus, and security.

Arista is growing fast, highly profitable, cash-rich, and positioned at the center of cloud and AI infrastructure spending.

Risks 👉 Potential Pitfalls

• Competition Risk: Arista faces intense competition from Cisco and lower-cost “white-box” alternatives, which could pressure pricing and market share.

• Customer Concentration: Heavy reliance on a handful of cloud giants means spending slowdowns or vendor shifts could cause sharp revenue swings.

• Capex Cyclicality: Cloud and data center spending is lumpy and tied to broader macro cycles, leaving Arista exposed to downturns or pauses in investment.

• Execution in New Markets: Expanding into campus, WAN, and security pits Arista against entrenched rivals, with integration and go-to-market challenges.

• Margin & Supply Chain Pressure: Sustaining 60%+ margins is difficult given reliance on Broadcom chips, customer bargaining power, and potential cost inflation.

• Valuation Risk: Trading at ~40× forward earnings, the stock is priced for perfection, leaving little margin for error if growth falters or sentiment shifts.

Wrapping Up…

Arista Networks has emerged as a true cornerstone of cloud infrastructure, combining rapid revenue growth, expanding profits, and disciplined execution with a clear lead in technology transitions like 400G and 800G. By steadily gaining share from incumbents and extending its cloud-hardened innovations into enterprise markets, Arista has built a rare profile: a cash-rich, mature business that still captures the upside of early-stage revolutions in AI and cloud computing.

While the stock’s premium valuation reflects the market’s recognition of this success, the company’s proven ability to navigate competitive battles and technology shifts underscores its resilience. For long-term investors who believe in the continued expansion of cloud and AI, Arista represents a best-in-class picks-and-shovels play on the digital economy, powering the high-speed networks that serve as the highways of the information age.

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The GRIT Alpha Team

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Sources: Arista Networks Relations (September 2025): https://investors.arista.com/Home/default.aspx

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