If one or two customers donate a lot of revenue to a single business, problems can arise. Suppliers need to maintain a great relationship and perhaps give some concessions to these large clients. Otherwise, you could suffer from business.
This is what happened on the meta platform last week. (Meta) 2.46%)) Arista Network (anet) 3.77%)). Meta, formerly Arista’s biggest customer, pulled back spending in 2024. The news led investors to sell their shares hard. That’s a big response, but is it exaggerated?
Meta platform accounts for the majority of Arista’s total revenue
Arista Networks provides data center networking solutions to its clients. Essentially, companies that need to send information from one data center to another are potential clients at Arista. There are many companies with data centers scattered around the world, but few can fit the size of a wide range of high-tech giants. As a result, investors should not be surprised that they have a high return from a small customer base. This is no different from GPU manufacturer Nvidia (NVDA) 3.67%))This is because there are multiple companies each making more than 10% of their total revenue.
But the problem with Arista is that Meta cut its spending with Arista last year. In 2024, Meta accounted for 14.6% of Arista’s total revenue, indicating that Meta spent about $1.02 billion with Arista. However, in 2023, Meta accounted for 21% of Arista’s revenue, accounting for $1.23 billion. But does that mean investors should panic?
i don’t think so.
Management pointed to one important trend that Meta enacted in 2024: the year of efficiency. Meta pulled back capital expenditures throughout 2024, but recently accelerated in the fourth quarter.
Metacapital Expenditure (TTM) Data by YCHARTS
Arista management claims it is a victim of Meta’s efficiency years, but expects the company’s sales to recover this year with Meta. Meta says there will be capital expenditures of between $60 billion and $65 billion in 2025, which will mainly be spent on AI infrastructure. There is good news on the horizon as Arista will become a direct beneficiary of this spending.
Arista forecasts revenue growth of 17% for 2025. This isn’t far from the 19.5% growth posted in 2024. So the market kneeling response was probably not entirely correct.
As a result, this opens up buy opportunities for investors.
Even after the sale, Arista stocks are not cheap
Arista Networks is not the cheapest stock as it trades at forward revenues of around 37 times, the level it last reached in September 2024.
ANET PE ratio (forward) data by YCHARTS
Still, 37 times more advanced revenue is rather expensive compared to other tech stocks growing at similar rates. Nvidia operates in fairly similar markets, and is expected to report fourth quarter revenue growth of 73%. However, the stock trades 30 times the progressive profit. Still, Arista’s products are the best and its clients are committed to working with them for the future.
So, I don’t think that’s a bad idea if an investor wants to take a small position in the stock to take advantage of the sale. However, it may be wise to build a position with small pieces as prices may continue to drop until investors get good news from Arista.
Randi Zuckerberg, a former director of market development, Facebook spokeswoman and sister to Metaplatform CEO Mark Zuckerberg, is a member of Motley Fool’s board of directors. Kizen Drury has a job at Nvidia. Motley Fool has positions include Arista Networks, Meta Platforms and Nvidia. Motley Fools have a disclosure policy.
