Arista Networks Stock Plummets on Margin and AI Growth Concerns

What happened

Arista Networks' stock has dropped 23.1% over 21 trading days, driven by weaker-than-expected margin guidance for Q4 2025 and skepticism about AI-driven revenue growth. The company's strong execution and defensible EOS-led model, highlighted in the DeepValue report, are now overshadowed by these immediate pressures. Despite robust cash generation and a net cash balance sheet, the stock's premium valuation—with a P/E of around 60 and EV/EBITDA of 26—appears increasingly vulnerable. Investor doubts center on whether AI Ethernet adoption will accelerate as hoped, amid risks from customer concentration and supplier dependence. This decline underscores the volatility that the DeepValue report cautioned about, challenging Arista's near-term growth narrative.

Implication

The stock decline highlights that Arista's rich valuation may not hold if margin pressures and slower AI adoption persist, eroding earnings potential. With nearly half of revenue tied to cloud and AI titans, order timing volatility could worsen, impacting financial stability. Dependence on key suppliers like Broadcom adds supply chain risks that might amplify any downturns. While the strong balance sheet and buyback program offer some cushion, they are unlikely to fully offset growth deceleration or competitive threats. Investors should wait for clearer signals on margin recovery and AI deployment pace before committing new capital, as the current setup favors caution over optimism.

Thesis delta

The DeepValue report's HOLD thesis, based on premium valuation and execution risks, is reinforced by the stock drop and guidance concerns. This shift emphasizes that anticipated AI-driven growth may be slower and margin pressures more acute than previously modeled. However, the core strengths in EOS and merchant silicon remain, so the change is in risk assessment rather than a fundamental downgrade.