Arista Networks is the IBD Stock of the Day ahead of the first-quarter earnings report for ANET stock on May 1.
The networking player is several weeks into a new consolidation and now in a pullback mode. If ANET stock bounces from its 50-day moving average past its 21-day exponential moving average, that would be bullish. Arista stock would be actionable.
Management commentary on cloud capital spending and the buzz over artificial intelligence software could move the stock.
"Arista has enjoyed a great run since it last reported earnings with the stock up 14% (S&P 500 -1%) as they have benefited from investor interest around AI as well as a broader rotation back towards growth," Evercore ISI analyst Amit Daryanani said in a note to clients.
He added, "Arista should continue its track record of beats and raises in the March quarter. We think focus will remain their 2023 guide and their expectations from AI workloads going forward."
ANET Stock: Call Options Strategy
On the stock market today, Arista stock rose 2.2% to close at 160.16. ANET stock has gained 30% in 2023, and advanced about 1,360% since the company's 2014 initial public offering.
Santa Clara, Calif.-based Arista sells computer network switches that speed up communications among racks of computer servers packed into "hyperscale" data centers. These internet data centers are designed to ratchet up computing horsepower when demand surges.
For the first quarter, analysts project earnings of $1.35 a share for ANET stock, up 61% from a year earlier. Revenue is expected to climb 49% to $1.31 billion.
Investors may want to be cautious ahead of the earnings report. One strategy around earnings would use call options. That approach would let investors cap their possible loss while still letting them participate in post-earnings upside.
Otherwise, investors could look for market reaction to the first-quarter earnings report.
Microsoft Is Its Biggest Customer
Meanwhile, Microsoft and Facebook-parent Meta Platforms, Arista's two biggest customers, reported results this week and updated investors on their capital spending plans.
Microsoft accounted for 16% of Arista sales in 2022 and 15% in 2021. Microsoft reported capital spending of $6.6 billion for its fiscal third quarter that ended March 31. That's up 5% from the previous quarter and 24% year over year, in line with analyst estimates.
Long-term, Microsoft guided for "a material sequential increase" in capital spending driven by cloud computing investments in artificial intelligence infrastructure, Raymond James analyst Simon Leopold said in a note.
Cloud computing rivals Amazon.com and Google-parent Alphabet also expect a long-term boost from AI workloads.
A Positive From Meta Earnings
As for the Facebook parent, "Meta maintained its capex outlook for 2023 at $31.5 billion, which we think is net positive to ANET given some fear of cuts," Barclays analyst Tim Long said in a note.
He added: "Meta is one of the two major cloud companies that account for a larger portion of ANET revenue. Meta is heavy on AI in its data centers, where ANET generally has more content."
For ANET stock analysts, debate over the valuation of Arista stock hinges on how much revenue growth will slow.
Arista's revenue boomed more than 48% in 2022 as Facebook and others increased data center spending. In 2023, analysts predict revenue growth of 26%. In 2024, analysts currently model sales growth of 12%.
But some companies may reaccelerate spending on cloud services if artificial intelligence tools deliver on product innovation.
ANET Stock: Enterprise Market Traction
Startup OpenAI in November launched its ChatGPT internet search software. Microsoft is OpenAI's biggest investor.
ChatGPT is part of a wave of generative AI technologies that could roil a host of industries by creating text, images, video and computer programming code on their own.
Amid the emergence of generative AI, Wall Street analysts say many of Arista's customers will boost investments in networking bandwidth.
Since its IPO, the hyperscale cloud market has been the biggest growth driver of ANET stock. But Arista has also gained traction in the enterprise market for "campus" network switching gear sold to large companies.
But Cisco Systems remains the biggest seller of enterprise network gear by far. Enterprise customers are large companies in financial services and other sectors, along with government agencies and educational institutions.
Meanwhile, ANET stock holds a Relative Strength Rating of 95, according to IBD Stock checkup.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
