Arista Shares Slide On Fears Of Slowing IT Spending

Arista, which builds networking hardware used by both corporate data centers and cloud computing vendors, counts
Microsoft
(MSFT) and
Meta Platforms
(META) as its largest customers. Fish wrote in a Wednesday note that the downgrade reflects his concerns about overall 2024 networking spend by both enterprise and cloud customers. He also thinks that after this year’s surge in the stock price, the risk-reward for investors now looks more balanced.

Fish says he still believes Arista can report third-quarter results above Wall Street’s consensus levels. He also still views the company as “a secular winner in a cyclical space,” which offers investors’ significant exposure to increased spending for artificial intelligence workloads, among other things.

But Fish also noted that Arista is trading well above its historical average valuation. He thinks that its stock price already embeds double-digit 2024 growth, “despite cloud digestion, limited visibility and enterprise budget concerns.”

The enterprise spending tailwind that helped boost shares this year might not be sustainable in 2024, he says, as customers opt to increase the useful life of some networking hardware. “Switches are one of the segments most at risk to decline in spending because of IT budget pressures,” he wrote, referring to a key piece of hardware.

Fish contends that the networking sector benefited this year from “backlog flush” following a pandemic-era parts shortage. He expects to see cloud companies in “digestion” mode in 2024 and absorbing the recently higher shipments.

“Arista is a company that can sustain double-digit top-line growth over a multi-year period, in our view, but it may be challenging in 2024 without a change in the environment or AI pickup,” Fish wrote.

Write to Eric J. Savitz at [email protected]