Arista's Strong AI-Driven Growth Confronts Persistent Valuation and Risk Concerns

What happened

Arista Networks reported a 28% revenue surge to $2.3 billion in Q3 2025, fueled by robust demand for its 400G/800G switches from hyperscalers and AI data center builders. Management's guidance for 19% growth in Q4 highlights continued momentum in the AI networking cycle, aligning with the company's strategic focus on high-speed Ethernet. The DeepValue report underscores Arista's exceptional execution, with a defensible EOS-led model and strong cash generation, including $1.84 billion in H1 2025 operating cash flow and a new $1.5 billion buyback. However, the stock's rich valuation—trading at a P/E of ~60 and 26% above intrinsic value—amplifies risks from customer concentration and supplier dependence. Despite the growth, these factors sustain the HOLD rating as the AI thesis faces scrutiny over durability and timing sensitivities.

Implication

Arista's impressive revenue growth and upbeat guidance validate its leadership in AI networking, but the stock's elevated multiples limit near-term upside potential. Customer concentration, with Cloud and AI Titans accounting for 48% of revenue, introduces significant order timing volatility that could disrupt financial stability. Supplier reliance on key partners like Broadcom adds supply chain risks, potentially impacting product availability and margins. The company's robust cash flow and buybacks signal confidence, yet these do not fully mitigate the overvaluation relative to intrinsic benchmarks. Consequently, investors should monitor adoption pace and diversification efforts closely, as sustained improvements are needed to justify a more bullish position amid current headwinds.

Thesis delta

The recent strong performance reinforces Arista's execution in AI networking but does not alter the core HOLD thesis, as valuation concerns and inherent risks remain prominent. A shift to a more positive outlook would require clear evidence of sustained 800G adoption, reduced customer concentration, or improved supply chain resilience.