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As prominent tech firms keep spending on AI infrastructure, Arista Networks (ANET +9%) continues to reap the benefits, delivering another quarter of healthy top and bottom-line upside in Q2. ANET is a cloud networking systems provider for large data centers, campuses, and routing environments. Its two largest customers are Meta Platforms (META) and Microsoft (MSFT), which comprised around 39% of its FY23 revs. As more companies equip GPUs for AI workloads, ANET has been gaining steam. To take full advantage of AI, firms require high-speed switching; any slowdown in the network can keep organizations from realizing AI's full potential.

While ANET was amid a roughly 15% correction from July highs ahead of its Q2 results, it had little to do with AI. In fact, numerous companies that reported earnings during that time mentioned how robust the AI landscape is, with major chip companies, like Taiwan Semi (TSM), only increasing their AI-related revenue forecasts for the year. Given the ongoing AI frenzy, ANET remains poised to benefit tremendously, especially if META and MSFT continue to grow their CapEx at elevated rates to build their AI infrastructure.

• In Q2, ANET posted adjusted EPS of $2.10, topping estimates by double-digits, on revs of $1.69 bln, a 15.9% jump yr/yr, exceeding the company's +11-13% forecast. Growth stemmed from all three sectors: cloud, enterprise, and providers. Most of ANET's strength came from the Americas at 81%, with International comprising the rest. Management remarked that its APJ region exhibited some relative weakness.
• Customers are responding positively to ANET's product suite. The company discussed several notable customer wins during its Q2 call, such as a Tier 2 cloud provider, e.g., IBM, Oracle, etc., aggressively investing in AI GPUs. ANET was chosen due to its ability to solve performance and scale problems this customer was having with their AI applications. Examples like this highlight ANET's long-term ability to only accelerate revenue as customers turn to network providers to squeeze as much out of AI as possible.
  • Additionally, as NVIDIA's (NVDA) newest Blackwell platform rolls out, more of ANET's 800-gig products will be necessary, adding another tailwind heading into 2025.
• As usual, ANET delivered strong Q2 numbers without sacrificing margins. The company expanded its gross margins by 410 bps yr/yr and 120 bps sequentially to 65.4%, above its 64.0% prediction.
• Looking ahead, ANET did guide somewhat conservatively, projecting Q3 revs of $1.72-1.75 bln, or roughly +15% growth yr/yr at the midpoint, marking a further deceleration from the past several quarters. For the year, ANET expects revs to climb by at least +14%, slightly below analyst forecasts. Investors are not too concerned, however. ANET tends to guide prudently. Plus, the management expressed confidence that 2025 will be a huge growth year.

Aside from conservative guidance, ANET's Q2 report was airtight. The spending on AI infrastructure remains robust, keeping a powerful wind at ANET's back, which is expected to intensify by 2025.