|Arista: Nomura Pounds the Table; Routing is Next|
By Tiernan Ray
Shares of networker Arista Networks ( ANET) are up 99 cents, or 1%, at $81.79, after Nomura Equity Research’s Jeffrey Kvaal this morning reiterated a Buy rating, and a $95 price target, writing that his meeting with the company’s CFO Ita Brennan during Nomura’s recent media and telecom conference gave him “greater confidence in intermediate-term trends, long-term growth, and Arista’s margin structure.”
In particular, Kvaal is not worried about spending by the “hyper scale” data center operators — Microsoft ( MSFT), Amazon.com ( AMZN), andGoogle ( GOOGL), who serve as some of the primary customers for Arista’s switching gear:
Indicators for data center spending remain healthy—end customer demand for the public cloud does not appear to be slacking [...] We expect Arista to benefit from both capex growth and share gains at its top cloud customers. Microsoft has said it would like nearly triple its $6.6bn cloud business, which naturally leaves little room to slow its expansion of data centers. Arista now supplies 7 of the top 8 vs. 6 of the top 7— we believe Alibaba is a newer addition. Alibaba has announced plans to invest $1bn in data centers outside of China. Demand from technology and Tier 2 cloud players remains healthy. We believe Arista has steadily expanded its roster of customers beyond the top cloud players into still large though slightly smaller accounts. We consider this a long-term positive, although likely overshadowed for now by the growth in the top tier cloud players.
Here’s Kvaal’s projection for spending on capital investments by the top cloud providers:
Arista may be primed to add top-tier telcos to its customer list, such as AT&T( T), believes Kvaal:
Arista has been successful selling into tier 2 service providers. Cable companies tend to be significant customers for content hosting. So far, however, the Tier 1 community has been closed to Arista. We believe the company has been in discussions with these larger players for some time. The premise of NFV and SDN, which AT&T and Verizon have both embraced, naturally requires massive yet nimble data centers. We believe contract wins and shipments are likely to be forthcoming in 2016.
And there’s more product additions on the way, writes Kvaal, with the company moving out from switching to network routing an area dominated by Cisco Systems ( CSCO):
We expect Arista to push hard into new product realms, such as data center routing and data center interconnect, beginning next year. Spotify and Netflix are already using Arista switches as a simple router. New silicon coming in the next several quarters will allow for larger routing tables and thus press harder into this market. We would imagine both Cisco and Juniper have a sizeable presence in cloud routing. Juniper has been more outgoing in discussing its presence here in part as these relationships are key to its new QFX 10000 data center switch. Security is not a focus for Arista.