Despite delivering better-than-expected earnings, shares of network equipment maker Arista Networks unexpectedly tumbled, reflecting both the market's sky-high expectations for AI-related stocks and investor scrutiny over its future growth drivers.
In its latest Q3 earnings report, Arista posted a 27% year-over-year revenue increase to $2.31 billion, with adjusted EPS at $0.75—both surpassing Wall Street estimates of $2.26 billion and $0.72, respectively.
However, the strong results failed to lift its stock, which slid in after-hours trading and extended losses the next day, dropping over 8%.
The market's negative reaction stemmed largely from unmet higher expectations. Arista's Q4 revenue guidance of $2.3–$2.4 billion (midpoint: $2.35 billion) only slightly exceeded analysts' $2.33 billion forecast. Additionally, the company maintained its long-term 2026 sales growth target of 20%, disappointing investors hoping for an upward revision.
Contrasting the short-term pessimism, management remained bullish. CEO Jayshree Ullal declared on the earnings call that the company is riding an "undeniable and explosive AI megatrend," dubbing it the "golden age of networking." She projected AI-driven growth would expand the total addressable market (TAM) for networking to over $100 billion in coming years.
**Growth Guidance Falls Short of Lofty Expectations** For a stock that had surged nearly 40% ahead of its 2025 earnings, merely "meeting" or "slightly beating" estimates proved insufficient to justify its premium valuation.
Evercore ISI analysts noted, "The post-earnings stock reaction reflects the lack of material upward revisions to forward earnings estimates." Raymond James analysts attributed the drop to "overblown expectations without fundamental shifts," maintaining a "market perform" rating.
Investors interpreted Arista's unchanged 2026 growth target as a sign that acceleration beyond current levels may not materialize.
**Product Sales Miss Raises Concerns** Deeper worries emerged from revenue breakdowns. Raymond James highlighted that Arista's beat relied heavily on services revenue (18% above estimates), while product sales—including flagship network switches—fell short.
As a key supplier of data center hardware to tech giants like Microsoft and Meta, softer product demand sparked concerns about near-term core business momentum, despite overall robust revenue growth.
**CEO Bets on AI-Driven "Golden Age"** Undeterred by the market’s reaction, Arista’s leadership doubled down on AI-driven opportunities. Ullal emphasized that AI model complexity is fueling demand for scalable networks, confirming the company’s $1.5 billion AI revenue target for 2025 remains on track.
William Blair analyst Sebastien Naji wrote that Arista believes it’s still in the "early innings of the AI megatrend," benefiting from both backend and emerging frontend AI networking demand.
**Ethernet Push to Cement AI Networking Role** To capitalize on AI, Arista is advancing next-gen networking tech. Reports indicate it recently partnered with AMD, Nvidia, Cisco, Meta, and Microsoft to launch the Ethernet Scalable Unified Network (ESUN) initiative, optimizing Ethernet for AI infrastructure.
Ullal confirmed Arista’s Ethernet portfolio aligns with Ultra Ethernet Consortium (UEC) standards and will expand compliance features. She expects AI-optimized Ethernet designs to solidify by 2026 and gain traction in 2027.