ANET stock jumps after strong Arista Networks earnings, but risks remain

Arista Networks stock continued its strong rally in the premarket session, reaching a record high of $214, after publishing strong earnings and guidance. It has jumped by over 86% from its lowest level this year, giving it a market capitalization of over $250 billion. The question is whether this trajectory will continue. 

Arista Networks’ business is booming

Arista Network is a top company in the networking industry, where it offers products like Ethernet switches, AI networking products, routers, and a network operating system. These products have all seen strong growth in the past few years, helped by the ongoing data center spending, which is expected to hit over $700 billion this year. 

Arista Network’s top clients are also among the biggest spenders. This includes companies like Microsoft, Meta Platforms, Oracle, Alphabet, and Anthropic. 

Therefore, it was not a surprise that the company released strong earnings report on Tuesday this week. In a statement, the company said that its revenue jumped by 40% in the second quarter and crossed the $3 billion milestone for the first time ever. In a statement, the company’s CEO said:

“As we deliver our first $3 billion quarter in Q2 2026, it is clear that our Arista 2.0 platform strategy is compelling. Customers see networking as the central nervous system for infrastructure from the client to campus to data and AI centers.”

The rising product prices continued rising, with the GAAP and non-GAAP operating margin rising to 45.4% and 49.9%, respectively. 

Combined with the first quarter, the company’s revenue jumped to $5.7 billion from the $4.2 billion it made in the same period last year. The same growth happened in terms of its profitability. 

Most importantly, the management estimates that the growth will continue in the coming months as demand continues rising. It now expects that its third-quarter revenue will come in at $3.3 billion, with its operating margin being between 48% and 49%. These estimates are much higher than the $2.83 billion that analysts were predicting. 

Valuation and technical risks remain

There are two main risks facing the Arista Networks stock. First, there is the valuation risk as the company has a forward price-to-earnings multiple of 51. This figure is much higher than the technology sector median of 24. Its five-year average was 41. 

Second, the stock has technical risks. For one, it has formed a big gap today, moving from Tuesday’s close of $190 to the current $214. In most cases, stocks and other assets tend to retreat and fill the fair value gap. Arista has done that in the past. For example, it formed a big down-gap after its last earnings and then completed filling it a few weeks later. 

The stock also sits substantially higher than the 100-day and 200-day moving averages. As a result, there is a risk that the stock will have a mean reversion, a situation where an asset reverses and retests the historical averages.