Arista's Record Q4 Earnings Mask Margin Pressure and Growth Uncertainty

What happened

Arista Networks reported record Q4 2025 revenue of $2.49 billion, driven by strong demand for AI Ethernet switching in hyperscale data centers. Despite this top-line growth, gross margins are under pressure from 'horrendous' memory costs and other component inflation, as highlighted in recent earnings calls. The company's growth prospects are questioned due to flat estimates and elevated purchase commitments of $6.8 billion, which increase inventory risk if demand timing shifts. High customer concentration with Microsoft and Meta, accounting for 35% of FY2024 revenue, adds volatility, and insider selling patterns suggest management may have concerns. Overall, while AI networking demand remains robust, execution risks around margin defense and working-capital management are becoming more pronounced.

Implication

The record revenue underscores Arista's leadership in AI networking, but margin compression signals persistent cost pressures that may undermine earnings quality. Elevated purchase commitments and inventory build-up expose the company to potential write-downs or excess charges if hyperscaler orders decline unexpectedly. Customer concentration risks mean any slowdown in Microsoft or Meta's AI infrastructure spending could significantly impact revenue and investor sentiment. Insider selling by key executives, despite the positive earnings narrative, adds to concerns about near-term valuation or business outlook. Given the rich valuation at 50.6x P/E, investors should wait for clearer evidence of margin stability above 62% and reduced working-capital risks before considering new positions.

Thesis delta

The new article confirms margin pressure and raises questions about growth prospects, reinforcing the DeepValue report's 'WAIT' rating and cautious stance. No major shift is warranted, but the validation of these risks strengthens the case for patience until Arista demonstrates sustained margin defense and commitment discipline. Investors should monitor Q1 2026 results for signs of improvement or deterioration in these key areas.