Arista Dominates High-Speed Switching, Earns a Wide Moat, and Is Making Inroads Into Campus Networks

Analyst

William Kerwin

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We view Arista Networks as the technology leader in high-speed switching for enterprise networking. We expect Arista to maintain its top market of high-speed ports above 100 gigabits and for it to augment its share in lower speeds and campus applications where it has historically been less penetrated. In our view, Arista’s software gives it a structural and durable competitive advantage over competitors in winning new customers, both in the cloud and in the enterprise. We believe this software-led approach provides the firm with a wide economic moat.

Arista’s performance at high speeds and its software-led approach set it apart from other networking equipment providers. Its Extensible Operating System, or EOS, gives customers a highly programmable, modular, and single image solution that can reduce downtime. Arista has foregone the proprietary hardware-plus-software lock-in approach of Cisco in favor of utilizing cutting-edge merchant silicon and focusing on software development, which allows the firm to offer top-tier performance at a competitive price point. We think its software focus has generated significant intangible assets and embeds it deeply with customers.

Arista is now looking to expand from its high-speed cloud heritage into the larger (and in our opinion, stickier) enterprise market. Arista first established itself in the most cutting-edge applications for hyperscalers, but we believe its modular software approach will prove attractive for smaller enterprises building out private clouds or on-premises data centers. We think share gains in the campus market will come, but more slowly. We view the enterprise market as stickier than the cloud market, due to more extended refresh cycles and more strained IT departments. In our view, Arista’s further penetration into the enterprise market will embed Arista deeper with its customers, augment switching costs, and widen the firm’s economic moat. Finally, we expect Arista to maintain its excellent profitability as it scales, with a robust research and development budget maintaining its intangible assets and its ability to exact pricing power.

Business Strategy & Outlook

We assign Arista Networks a wide economic moat rating based on intangible assets in high-speed networking and customer switching costs. We view Arista’s high-speed switches and software-led approach as significantly differentiated from other networking competitors and very difficult to replicate. We expect strength in high-speed switching to generate economic profits for Arista, more likely than not, over the next 20 years.

Arista’s networking switches for high-speed applications are best of breed, in our view, resulting from a software-led approach over its networking hardware. Arista’s specialty within networking is high-speed switches, at speeds of 100 gigabits or more, that are designed for data centers. These switches create a local network to then connect to a wider network and the internet. Data traffic continues to explode, increasing the need for Arista’s gear, in our view.

We believe Arista’s high-speed switches are the preferred option of both public cloud providers and enterprises building private clouds, and it occupies roughly one third of the market for 100-gigabit ports and faster. It has gained this share steadily since its founding in 2004 and has dethroned networking colossus Cisco at high speeds. We believe Arista’s share gains are the result of fundamentally better performance at higher speeds and a software-led approach that outsources semiconductor development to merchant silicon from the likes of Broadcom and Marvell.

Arista’s extensible operating system, or EOS, sets it apart from Cisco and other networking players and represents considerable intangible assets, in our view. We see Arista’s differentiation clearly in its first-class gross profit margins—rivalled only by Cisco (with which it is neck-and-neck) in networking equipment providers.

Arista’s decentralized software is the product of nearly two decades of development—moving from system-based software initially to a newer database and data lake approach. EOS presents a unique value proposition: its decentralized and open structure makes it appealing to hyperscalers with large IT teams that want to fine-tune software for mass deployment, while its robust array of features and modular APIs makes it easy to deploy for smaller-scale enterprise data centers. For all customers, Arista’s single image and fault-containment offer the possibility of easier network upgrades and lower downtime.

This contrasts with a networking competitor like Cisco, which focuses on features but locks customers into a closed ecosystem of chips, hardware, and software, all of which generate significant switching costs at their respective customers. We don’t foresee Cisco abandoning its walled garden in favor of Arista’s open approach. An existing networking competitor would have to rebuild its software platform to rival EOS’ decentralization and single image, and likely risk an inferior product lacking over a decade of evolution and fine-tuning based on customer feedback. On the other hand, an aspirational new entrant would find it difficult to build out an equally rich feature set of code and match Arista’s efficiency and security, even if it were to achieve hardware parity using merchant silicon.

We also see switching costs for Arista. We think networking equipment broadly carries switching costs for well-positioned providers. Arista’s proprietary software and hardware configurations require training and certifications, requiring weeks of class, hours of testing, and thousands of dollars in expense. Furthermore, networking setups take months to implement and years to optimize—Forrester claims that a typical business doesn’t fully utilize the value of new networking technology for two years. If a company were to switch away from Arista, it would require wholesale retraining of its workforce under a new vendor, inclusive of the time and expense to do so. Furthermore, an IT department would spend the time and expense of getting the new network off the ground and have to redesign workflows and processes to accommodate different software and optimize operations. Even cloud customers, which we typically think of as conducive to lower switching costs due to their multisourcing and disaggregated buying patterns, experience the stickiness of Arista equipment. Even if Arista isn’t installed in an entire network, the portions in which it operates become sticky, as cloud customers develop workflows for, and write software on, EOS. We also view EOS as complementary to base software like Microsoft’s SONiC or Meta’s FBOSS. Microsoft, as an example, uses EOS working on top of SONiC for portions of its network, which gives it the programmability and features of EOS while maintaining consistency with other non-Arista portions of its network.

We view the combination of Arista’s strength in networking hardware and software design with inherent switching costs to networking equipment as creating a wide economic moat to defend against competitive threats to economic returns for 20 years.

Wide

Economic Moat

Arista Networks

Arista Networks, Inc. engages in the development, marketing, and sale of cloud networking solutions. Its cloud networking solutions consist of Extensible Operating System (EOS), a set of network applications and Ethernet switching, and routing platforms. The company was founded by Andreas Bechtolsheim, David Cheriton, and Kenneth Duda in October 2004 and is headquartered in Santa Clara, CA.

Earnings data Q1 2024

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Arista Networks, Inc. engages in the business of developing, marketing, and selling cloud networking solutions. The firm is also involved in switching and routing platforms and related network applications. The company was founded by Andreas Bechtolsheim, David Cheriton, and Kenneth Duda in November 2004 and is headquartered in Santa Clara, CA.

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