We recently compiled a list of the 7 Best Computer Hardware Stocks to Buy. In this article, we are going to take a look at Arista Networks, Inc. (NYSE:ANET) against the other computer hardware stocks.
According to a report by Research and Markets, the computer hardware market is projected to grow from $674.44 billion in 2023 to $710.32 billion in 2024, with a 5.3% compound annual growth rate (CAGR), mainly driven by personal computing, global supply chains, internet expansion, and more data centers.
By 2028, the market is expected to reach $914.55 billion at a 6.5% CAGR, fueled by trends like remote work infrastructure, sustainable practices, smart city development, and digital transformation. Key trends include edge computing, AI integration, modular systems, biometric security, and hybrid cloud environments, with significant investments in smart city projects, particularly in China.
The most important trends in the advancement of computer hardware are AI and machine learning which are revolutionizing hardware design and enabling applications like autonomous vehicles and robotics. Apart from that, the Internet of Things (IoT) is expanding, connecting more devices in smart homes, cities, and industries. It has led to a focus on improving security, efficiency, and the ability of different IoT devices, systems, and technologies to work together seamlessly.
Role of AI in the Growth of the Computer Hardware Industry
On May 28, Michael Fertik, founder of Heroic Ventures, joined CNBC’s ‘Squawk Box’ and said that we’re still in a phase of AI development where hardware is crucial. Companies like NVIDIA are thriving because their products are essential for running large AI models, which require immense computational power. He said that this situation is similar to how search engines, like Google or Bing, have long relied on substantial investments in hardware to function effectively.
Fertik added that as AI technology evolves, there will be a shift. The costs associated with AI hardware will decrease, and smaller, more specialized AI models will emerge, which will be tailored for specific industries or purposes.
When this happens, the focus and financial gains will also move toward software and computer science (software testing and development) companies. However, they will not significantly move from computer hardware companies and they will still benefit from the growing AI industry.
Industry Has Room for Growth Beyond AI
A major growth prospect for computer hardware is quantum computing, an industry that is expected to reach $11.4 billion by 2027 from $2.74 billion in 2022, according to Research and Markets. Quantum Computing offers significant benefits by improving the speed and efficiency of complex computations.
Unlike classical computers, which process bits as 0s or 1s, quantum computers use qubits that can represent multiple states at once, which enables them to solve problems much faster. This is especially valuable in fields like cryptography, drug discovery, financial modeling, and optimization as it solves complex simulations and calculations that are currently infeasible for classical computers.
Quantum Computing can significantly benefit the computer hardware industry by driving advancements in technology and creating new markets. Similar to AI, the development of quantum hardware requires innovations in materials science, cooling systems, and chip design, which can push the boundaries of traditional hardware engineering.
As quantum computers become more practical, they will require specialized hardware components, which will create new opportunities for companies to develop and supply these advanced technologies. For more details, you can read our article about the 12 Best Quantum Computing Stocks To Invest In.
Our Methodology
For this article, we used stock screeners and other financial media websites to identify 12 computer hardware companies with market capitalizations of above $1 billion. The analyst comments and ratings were mostly taken from The Fly and TipRanks.
A technician in a server room managing a large-scale network of computers.
Arista Networks, Inc. (NYSE:ANET)
Stock Price as of August 9: $335.81
Average Analyst Price Target Upside as of August 9: 11.67%
Arista Networks, Inc. (NYSE:ANET), previously known as Arastra, Inc., is a leading American tech company known for its high-performance networking solutions and has made its name in the computer hardware industry. The company specializes in creating advanced Ethernet switches and software for large-scale data centers and cloud computing environments. Its flagship products include the 7280R Series and 7500R Series switches, which are engineered for rapid data transfer and scalability to meet the demands of hyper-scale cloud providers. Additionally, the company’s Extensible Operating System offers a cohesive software platform that improves network automation, monitoring, and management across its hardware.
With a focus on innovation and dependability, Arista (NYSE:ANET) is expanding its presence in the networking hardware market, serving major clients like Microsoft and Meta Platforms. It reinforces its role as one of the most significant computer hardware stocks to buy now.
On August 7, Meta Marshall from Morgan Stanley kept a Buy rating on Arista (NYSE:ANET), with a price target of $355. She believes the stock will perform well due to its strong position in the AI networking sector and enterprise market. Marshall added that the company is well-positioned to benefit from a large $70 billion market and is on track to meet its $750 million AI revenue goal by 2025. Furthermore, the company is making good progress in AI trials and could attract significant new customers.
Marshall noted that it is also gaining from its cloud-driven momentum and recent mergers, which have strengthened its product lineup. Although there is some uncertainty about the timing of AI deployments due to cloud readiness, the increase in deferred revenue is a positive sign for future growth.
On June 30, Arista (NYSE:ANET) posted Q2 non-GAAP EPS of $2.10 and revenue of $1.69 billion, which outperformed the analyst estimates by $0.16 and $40 million. For the third quarter, the company provided a revenue guidance of $1.72 billion to $1.75, compared to consensus estimates of $1.72 billion. Moreover, the company expects a non-GAAP gross margin of 63% – 64% and a non-GAAP operating margin of 44%.
The company’s better-than-expected results prompted Deutsche Bank to revise its revenue growth forecasts for the years 2024 through 2026 and increase its predictions by 2% to 4% for Arista (NYSE:ANET). Its updated projections now show expected revenue growth rates of 16% in both 2024 and 2025, and 13% in 2026. As a result of these higher revenue expectations and improved profit margins, the firm has adjusted its earnings per share (EPS) estimates for these years and now expects earnings of $8.38 in 2024, $9.43 in 2025, and $10.66 in 2026, showing an increase of 2% to 5% compared to their previous EPS forecasts.
Arista (NYSE:ANET) has a Moderate Buy rating as per the consensus opinions of 27 analysts that have covered it. As of August 9, the average price target of $375.00 implies an upside of 11.67% from the present levels.
Giverny Capital Asset Management stated the following regarding Arista Networks, Inc. (NYSE:ANET) in its fourth quarter 2023 investor letter:
“We did a bit of portfolio sculpting during the year, with mixed results. We trimmed Arista Networks, Inc. (NYSE:ANET) several times during the year as it soared. Those trims, a very small one in March at roughly $163 and a larger one in August at $183, don’t look smart with Arista finishing the year at $235 (and up more in January). Arista rose 94% this year. The good news is, Arista finished the year as our second largest holding, at 7.9% of the portfolio.
If you are wondering how I could sell some Arista at $163 but then hold most of it at $235, the answer is that Arista’s outstanding competitive position in Artificial Intelligence became clearer to me as the year progressed. I felt in March that Arista would earn $8 per share in a few years. I see today that it might earn $8 in 2025.
It’s possible there is AI-related froth in the Arista stock price, but also probable that Arista will continue to grow rapidly as the computing centers that process AI queries require enormous amounts of data bandwidth. I believe Arista’s routers and switches are the best tools for routing so-called hyperscale traffic. Also, its operating software allows computer giants to manage the kudzu-like growth of their data centers, lowering their total cost of operation.
The sales of both Arista and Heico reflected my desire to manage PE multiple risk. I keep learning the hard way, however, that trimming your winners generally doesn’t add value. If the valuation is beyond justification, sell the position. If the valuation is high but the business continues to dominate its niche, grow steadily and add value for customers, maybe just take a walk around the block until the urge to sell goes away.”
Overall ANET ranks 7th on our list of the best computer hardware stocks. While we acknowledge the potential of ANET as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ANET but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.