Arista Networks (ANET) posted an expected Q2 beat for EPS and revenue as its AI revenue is starting to be recognized, both from clouds and enterprise, Morgan Stanley said in a note Wednesday.

The investment firm highlighted the fact that "counter to expectations given beat" Arista's deferred revenue increased to $2.8 billion from $2.1 billion, which gives it a "meaningful runway for future growth."

Morgan Stanley noted, however, that the VeloCloud acquisition is bringing in less revenue than anticipated and is not expected to be material to 2025 revenue.

The analysts also said that while Arista's valuation is expensive, there is "potential for upward earnings revisions in this name as AI story proven out will cause name to trade closer to bull case in the near term."

The next catalyst for Arista's shares will be the company's Analyst Day event on Sept. 11, where the company is expected to release 2026 and longer-term targets, the analysts said.

Morgan Stanley kept Arista's overweight rating and increased its price target to $125 from $120.

Price: 137.63, Change: +19.51, Percent Change: +16.52