Key Takeaways
- Arista Networks reports on November 3. It has guided to about $3.3 billion of revenue, up 43%, and it has beaten its guide three quarters running.
- Analysts expect revenue to grow 41% this year and 29% in 2027, to $16.4 billion, so a revenue beat mostly confirms what’s priced in.
- GAAP gross margin has run between 61.9% and 62.9% for three quarters as the biggest, lowest-margin cloud customers grow fastest.
- After an 18% drop from its October record, the stock trades at 36x forward earnings, its five-year average, on estimates that assume margins hold.
Arista Networks (ANET) reports third-quarter results after the close on Tuesday, November 3, and another revenue beat looks like the safe bet. The number I’d watch is gross margin.
The stock goes in well off its highs. It closed at a record $216.74 on October 9, then fell 18% over the next five sessions on doubts about debt-funded AI buildouts. It lost another 8.5% on Friday in the broader tech selloff. None of that came from Arista’s own numbers.
Revenue Is the Easy Part for Arista
Management guided to about $3.3 billion of third-quarter revenue, up 43% from $2.31 billion a year earlier. It has beaten its own guide in each of the last three quarters, most recently with $3.04 billion in the June quarter against a guide of about $2.8 billion.
The rest of the AI networking supply chain isn’t slowing either. Monolithic Power (MPWR) said its communications revenue, which includes power chips for optical modules and switches, rose 135% from a year earlier to $187.4 million in its September quarter. Ciena (CIEN) said sales straight to cloud providers grew more than 80% in its fiscal third quarter.
Analysts have that demand in their numbers. They expect revenue to climb from $9.01 billion in 2025 to $12.7 billion this year and $16.4 billion in 2027.
That’s 41% growth this year and another 29% in 2027, already built into the estimates. A revenue beat on Tuesday mostly confirms what’s priced in.
The Biggest Customers Pay the Least
Arista’s fastest growth comes from its lowest-margin customers. The biggest cloud builders buy in huge volumes at big discounts, and management has said product margins on those sales sit well below 60%. Arista’s two largest customers took 42% of its 2025 revenue.
GAAP gross margin peaked at 65.3% in the June 2025 quarter. It slipped to 64.6% the next quarter and has run between 61.9% and 62.9% for the last three.
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Product Margin Is Where It Shows
Service isn’t the problem. GAAP service gross margin was 81.9% in the June quarter, against 82.0% a year earlier, while product margin fell to 59.8% from 62.3%. The company puts most of that on customer mix, with memory and chip costs second. CEO Jayshree Ullal called memory prices “horrendous” on the fourth-quarter 2025 call.
For the third quarter, Arista guides to an adjusted gross margin of about 63%, after 63.4% in the June quarter and 65.6% a year earlier. One point of margin on $3.3 billion is only about $33 million of quarterly gross profit. The reason to watch it is the direction it’s heading, not one quarter’s dollars.
Spending Has Covered the Gap So Far
Arista’s profit has kept growing anyway. GAAP operating expenses rose 17.7% in the June quarter while revenue rose 37.7%. That lifted adjusted operating margin to 49.9% from 48.8%, despite the thinner gross margin.
Part of that comes from research spending growing slower than sales. Adjusted R&D was just 9.2% of revenue in the quarter. If Arista steps that spending back up while gross margin keeps slipping, the 48% to 49% operating margin guided for the third quarter gets harder to hold.
Arista Stock Now Trades at an Average Multiple
The October selloff did most of the de-rating. Arista’s forward P/E was about 44x at the end of September and is now 36x, right at its five-year average and well below its 55x peak in January 2025.
So investors are paying Arista’s usual multiple on estimates that assume margins hold. Analysts expect normalized EPS to grow 38% this year and 27% in 2027, close to their revenue growth forecasts of 41% and 29%. If gross margin keeps sliding, EPS growth falls behind revenue and the estimates come down. The stock can then fall even at a steady multiple.
Where 36x Leaves Arista Stock
Arista can beat on revenue on Tuesday and still disappoint if adjusted gross margin lands below 63% again. At 63% or better, with operating margin inside 48% to 49%, 36x looks fair for a company growing 30% to 40% a year. The October drop would then look like sector fear rather than anything Arista did.
Pricing will help less than it sounds. Management expects its price increases to reach results late this year and into 2027, but CFO Chantelle Breithaupt has said the increase on memory-heavy products was set to “at least keep us margin neutral.” That offsets memory, the secondary cause. Customer mix, the main one, has no fix in sight, which is why the fourth-quarter margin guide matters more to me than the size of the revenue beat.
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