We recently published a list of 10 Best AI Stocks to Buy Based on New AI ETF. Since Arista Networks Inc (NYSE:ANET) ranks 10th on the list, it deserves a deeper look.
Over the past few months the market has seen a massive influx of AI-related ETFs as investors look to ride the bandwagon of AI investing. A report from Wall Street Journal in June said that all ten AI ETFs tracked by website ETF.com saw inflows this year. One major AI ETF, launched by Roundhill, saw its assets grow to $35 million from under $1 million in just two weeks.
Amid the craze of AI ETFs, does it make sense to start investing in every new ETF? Analysts offer some guidance. A Wall Street Journal report quoted Morningstar analyst Kenneth Lamont, who said that we should look for “thematic purity” while investing in AI ETFs. The ETF you choose, according to the analyst, must be investing in “bellwether” stocks positioned to benefit from the AI industry trends.
There is a new AI ETF in town. KraneShares Artificial Intelligence and Technology ETF (AGIX), launched earlier this month, tracks the Solactive Etna Artificial General Intelligence Index, which captures the performance of AI tech companies. The index seeks exposure to three main AI categories: hardware, infrastructure, and applications. The index picks companies by assigning AI Exposure Score, which assesses each company’s relevance to AI tech. You can get exposure to AI companies focusing on data centers, LLMs, AI tech to reduce costs and improve customer experience.
In this article, we will discuss the top 10 holdings of this new AI ETF and see whether they have the potential to rise in the coming months and weeks. With each stock, we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Arista Networks Inc (NYSE:ANET)
Number of Hedge Fund Investors: 69
Cloud-based networking solutions company Arista Networks Inc (NYSE:ANET) is also among the top ten holdings of the AGIX AI ETF.
Last month, Citi analyst Atif Malik increased his price target on the stock to $385 from $330. The analyst thinks while InfiniBand (a computer networking standard where NVDA has an edge) can take a major chunk of the AI networking market, Ethernet (Arista’s strength) is clearly gaining share. The analyst also said the AI back-end switching total addressable market could reach $15 billion by 2027, up from $10 billion. Based on these catalysts, the analyst increased his earnings estimates for Arista Networks for 2024, 2025 and 2026 by 4%, 16% and 13%, respectively.
What makes Arista a promising AI stock?
Arista Networks Inc (NYSE:ANET) is set to gain amid the AI-driven shift to high-speed networks due to its open Ethernet design and unified Arista EOS. The company’s partnership with Broadcom also created an opportunity for Arista Networks Inc (NYSE:ANET) to expand its integrated software and hardware solutions.
Arista Networks Inc (NYSE:ANET) claims its Ethernet architecture based on merchant silicon allows fast deployment for major hyperscalers and Tier-2 cloud providers.
During Q1 earnings call, Arista Networks Inc (NYSE:ANET) management said it targets $750 million in AI revenue by 2025.
Ethernet at scale is becoming the de facto network and premier choice for scale-out AI training workloads. A good AI network needs a good data strategy delivered by a highly differentiated EOS and network data lake architecture. We are therefore becoming increasingly constructive about achieving our AI target of 750 million in 2025. In summary, as we continue to set the direction of Arista 2.0 networking, our visibility to new AI and cloud projects is improving, and our enterprise and provider activity continues to progress well.
Read the full earnings call transcript here.
Despite Nvidia’s integrated Ethernet approach with Spectrum-X, Arista Networks Inc (NYSE:ANET) is confident about its scalable AI solutions using Jericho-based platforms, which could drive broader market adoption. Arista Networks Inc (NYSE:ANET) EOS offers a unified interface for various network applications, making it a reliable choice for cloud providers.
Arista Networks Inc (NYSE:ANET) does not see Nvidia as a direct competitor in the Ethernet space yet and playing on its strengths instead of competing against a giant gives it a strong position in the market.
Artisan Mid Cap Fund stated the following regarding Arista Networks, Inc. (NYSE:ANET) in its Q2 2024 investor letter:
“Notable trims in the quarter included Chipotle and Arista Networks, Inc. (NYSE:ANET). Arista Networks is the market leader in cloud networking equipment used in data centers. Shares have experienced strong outperformance since the beginning of 2023 due to its ethernet options being well positioned to capture market share in AI cloud environments (more scalable and cheaper than InfiniBand, an out-of-the-box solution by Nvidia). Similar to Chipotle, after a period of strong performance, we trimmed the position based on valuation and market cap.”
Overall, Arista Networks Inc (NYSE:ANET) ranks 10th on Insider Monkey’s list titled 10 Best AI Stocks to Buy Based on New AI ETF. While we acknowledge the potential of Arista Networks Inc (NYSE:ANET), 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.