Cloud networking specialist Arista Networks Inc. (NYSE: ANET) cleared a cup base on February 14 after reporting better-than-expected fourth-quarter results. The company also issued strong revenue guidance.  

Shares rocketed 4% in triple average volume, reaching their best levels in over a year. The stock remains in buy range after pulling back on February 15. 

Arista’s main product focus is on switches to speed up data-center computing. The elephant in the room within the computer networking industry is Cisco Systems Inc. (NASDAQ: CSCO), whose market capitalization is $195.96 billion, versus Arista’s market cap of $43.23 billion. Cisco is also Arista’s main competitor. 

Smaller rivals include Juniper Networks Inc. (NYSE: JNPR) and Extreme Networks Inc. (NASDAQ: EXTR).

Arista’s fourth-quarter revenue came in at $1.275 billion, up 55% from the year-earlier quarter. Earnings were $1.41 per share, an increase of 72%. In the past eight quarters, Arista grew revenue at rates ranging from 24% to 57%. 

Earnings grew between 21% and 72% during that time. Earnings growth accelerated in the past five quarters. That kind of momentum indicates good management with an eye on return on equity. In this case, that’s also easy to see, as Arista boasts an ROE of 33%, although several of its industry rivals also have strong ROE. 

Earnings growth acceleration can often lead to price gains in a stock, as that catches the attention of institutional buyers. 

Buyers Outnumber Sellers

MarketBeat data on Arista’s institutional ownership shows that the big buyers far outnumber big sellers. In the past 12 months, 601 institutional buyers accounted for $9.71 billion in inflows. Meanwhile, 395 institutional sellers accounted for $2.88 billion in outflows. 

A significant portion of Arista’s revenue comes from a group known as the Cloud Titans, which are big corporations whose systems routinely handle massive amounts of data. The list consists of the usual suspects, such as Microsoft Corp. (NASDAQ: MSFT), Meta Platforms Inc. (NASDAQ: META),  Amazon.com Inc. (NASDAQ: AMZN), International Business Machines Corp. (NYSE: IBM), Alphabet Inc. (NASDAQ: GOOGL) and Apple Inc. (NASDAQ: AAPL).

Cisco and Arista are fierce rivals for business from those giants. 

CEO Jayshree Ullal broke out Arista’s revenue streams in the earnings conference call.

“In terms of Q4 2022 verticals, cloud titans was our largest and first, followed by enterprise, and then specialty cloud providers at third place, financials at fourth, and service providers at fifth place,” she said, adding that revenue from the cloud titans constituted 46% of total sales. 

She also noted that both Meta and Microsoft contributed 25.5% and 16%, respectively. Some analysts expect other cloud titans to increase their spending with Arista in the next two years.

Risk With 46% Of Revenue From Just Two Customers

In a January report, Bank of America reiterated its buy rating on Arista, despite expectations that the Cloud Titans would decelerate spending this year as they cut costs. In addition, analysts expressed a real concern about two customers accounting for 46% of total revenue, which is risky for any company to be in. 

Nonetheless, Bank of America said that easing supply constraints could translate into higher growth in 2023 for non-Cloud Titan customers. In addition, it expects the Cloud Titans will continue to invest in their networks, addressing growing bandwidth needs and investments in artificial intelligence. 

According to analyst data compiled by MarketBeat, the consensus rating on Arista is “moderate buy,” with a price target of $172.70, a potential upside of 22.55%. 

Analysts Lifting Price Targets

Arista’s chart reveals a stock that’s had trouble gaining traction since late 2021, despite hefty institutional investment. Immediately after the fourth-quarter report, 11 analysts boosted their ratings or lifted their price targets. 

That suggests that Wall Street sees reduced supply-chain constraints and increased business from customers other than Microsoft and Meta as offsetting lower capital expenditures from Cloud Titans and making up for that potential deficit. 

Arista Networks is currently in the buy range, near a buy point of $141. As always, refrain from chasing a stock if it rallies too far above its buy point; instead, wait for a pullback to a key moving average which can present a new buy opportunity.