By Jacob Sonenshine

Arista Networks stock is one to hold on to, even with its post-earnings dip.

Shares of the $168 billion switches, router and software maker for data centers are still hanging on to a 41% gain since our recommendation in June.

Our thesis was simple. We thought earnings would continue to grow fairly rapidly, as the company has the technology expertise and management team to maintain or increase market share in a growing industry. U.S. software and internet companies are spending more on data centers for their artificial intelligence every year, requiring more of Arista's newer switches.

The thesis has largely played out, though it hit a stumbling point on Nov. 5, with the stock down almost 9% after reporting earnings.

This comes even though third quarter sales of $2.3 billion and earnings of $0.75 per share beat estimates. Revenue grew 27% year over year. The issue is that fourth quarter sales guidance was a touch light, calling for $2.35 billion at the midpoint of the range, below analysts estimates of $2.37 billion, according to FactSet.

That implies 1.8% quarter over quarter growth, less than the mid single digit and sometimes double digit growth the market is used to seeing. That is a somewhat granular data point that pessimists will hang onto, as they fear "white box" competition, or the emergence of Big Tech's own equipment taking share from Arista's.

It isn't the story playing out right now however. For one, third quarter earnings releases from Meta Platforms, Alphabet and Microsoft brought about no mention that they have any particular or renewed focus on making more of their own equipment.

"Bears will point to White Box concerns...but the fundamentals for networking are there," writes Melius Research analyst Ben Reitzes.

Indeed Big Tech's capital investments -- think data center buildouts -- are set to increase double digits in 2026, as seen by their third quarter earnings calls. That is driving demand for Arista's products, which will eventually grow to the market's expectations.

Additionally, the disappointing guidance likely doesn't reflect a deterioration in demand. CEO Jayshree Ullal said on the earnings call the outlook is "largely supply driven."

When Arista is able to ship all products that are in demand, it usually beats expectations, Ullal said. Arista has surpassed analysts sales and earnings estimates in all of at least the past 20 quarters.

Better-than-expected sales in the fourth quarter would mean year over year growth in the mid-20s, where the market is accustomed to seeing it come in. It would also likely mean higher profit margins. Even though the company guided to a 2 percentage point year over year drop in gross margins in the fourth quarter -- AI-related sales currently carry lower margins -- the bottom line is in solid shape. Since costs such as research and development haven't grown so rapidly, analysts forecast that the operating mating can remain unchanged in the fourth quarter.

That is why analysts still expect that, as sales continue to grow, EPS can rise over 20% annually for the next three years. Any better-than-expected margins would boost the profit growth even more.

Higher earnings should boost the stock. It's now trading at 41 times expected EPS for the coming 12 months, and while that may sound expensive, it's below this year's peak of 51x. AI-related companies that live up to growth expectations tend to trade richly, as seen by the near-40 times that Broadcom, highly data center-exposed Vertiv Holdings, and connector-maker Amphenol, trade at. Chip maker Advanced Micro Devices trades at 40 times.

"A premium valuation is warranted," writes KeyBanc analyst Brandon Nispel, who maintained his Overweight rating.

For Arista, the best action is inaction. Hold on to the shares.

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November 10, 2025 21:23 ET (02:23 GMT)

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