Why Arista Networks Plunged Today

Why Arista Networks Plunged Today

Shares of data center switch juggernaut Arista Networks (NYSE: ANET) plunged on Friday, down about 8.6% as of 2:20 p.m. ET.

While the entire tech sector and frankly the entire market was down today, Arista was doubly affected by an analyst downgrade. The content of the downgrade was especially worrying, given that Arista may find itself with a tough brand-new competitor: Nvidia.

Nvidia is getting into Ethernet switches

Analyst Mike Genovese of Rosenblatt Securities made the big downgrade today, lowering his price target on Arista from $330 to just $210. That’s a big move with the stock around $270 today, essentially flipping from a buy to a sell.

A double downgrade is somewhat rare on Wall Street, and implies a big reassessment of a company’s outlook. In this case, Genovese notes that Arista’s outlook for $750 million in 2025 artificial intelligence (AI)-related switch sales is at risk from a brand new competitor: Nvidia.

Arista investors may not have contemplated Nvidia as a competitor, as Nvidia is known for its market-leading GPU chips for artificial intelligence. However, with the acquisition of Mellanox in 2019, Nvidia also acquired key AI Infiniband networking technology.

Infiniband competes with the more industry-standard Ethernet networking technology. While Infiniband has been the best solution for AI networking in recent years, it is largely expected that Ethernet will develop into a more competitive AI networking technology, perhaps becoming the preferred solution in the near future. Arista, as a leader in ethernet switching, is supposed to benefit from that transition.

However, Genovese noted that Nvidia is now developing its own ethernet switch solution in response. And given that Nvidia can package its networking solutions with its highly in-demand chips, Genovese expects Nvidia to gain an outsized share of the AI ethernet market, hurting Arista.

A big concern for an expensive stock

Arista has shown itself to be an excellently run company that has disrupted the data center switching market in the early part of the cloud computing era. But that’s also why the company now trades at a P/E ratio of 41, even after today’s decline.

That doesn’t leave much margin for error if an unexpected headwind emerges. It appears as though Nvidia’s rise is presenting such a challenge to Arista’s AI revenue and stock price today.

Should you invest $1,000 in Arista Networks right now?

Before you buy stock in Arista Networks, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Arista Networks wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $555,209!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of April 8, 2024

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Arista Networks and Nvidia. The Motley Fool has a disclosure policy.

Why Arista Networks Plunged Today was originally published by The Motley Fool