Do Hedge Funds Like Arista Networks, Inc. (ANET) As an AI Hardware Play?

We recently compiled a list of the 15 Best Hardware Stocks According to Hedge Funds. In this article, we are going to take a look at where Arista Networks, Inc. (NYSE:ANET) stands against the other hardware stocks.

With the first half of 2024 nearly over, artificial intelligence continues to play a dominant role in the stock market. Stocks that either design semiconductors that are used for AI applications, or those that use them to either streamline their internal operations such as coding or offer products to customers have also made significant gains. These show the optimism in Wall Street for accelerated computing technologies, which are collectively called artificial intelligence.

In fact, the impact of AI has been so strong that not only has it upended the status quo of the most valuable firms in terms of market capitalization, but it also allowed some of the top AI companies to post triple digit percentage share price returns over the course of the past twelve months. Some of the top performing AI stocks are up by 213% over the past twelve months and have appreciated by 773% since November 2022. Back then, the stock market was whimpering in the aftermath of rapid interest rate hikes by the Federal Reserve, which had hit technology stocks particularly hard since they benefit from a fast growth and low rate environment.

However, AI's impact on the stock market has fueled the triple digit percentage gains in some stocks since then. At the same time, it has also meant that major indexes continue to demonstrate robust performance that is fueled by the share price performance of mega cap technology stocks.

In 2024, the market has moved forward from investing in AI companies that can change the world with their hardware or software to evaluating whether these firms are delivering. The first quarter of the 2024 earnings season was the clearest example of this phenomenon, and it saw Wall Street take an unforgiving approach to large and small firms that presented even the slightest hint of being unable to either grow their revenues by targeting AI or control the costs of investing in the new technologies.

Within the AI industry, there are different categories of firms. Most of these, such as OpenAI, operate on the software side. This industry subsegment develops applications such as chat bots and other assistants along with expanding the use of AI to existing software such as image editing tools. AI hardware companies power these applications, and when compared to the software firms, not only do they command stable valuations, but they also see investors take comfort in the fact that the demand for their products is far more stable and predictable when compared to software demand. Recently Goldman Sachs published a bullish report on hardware stocks due to AI, which we covered in 15 Best Hardware Stocks According To Goldman. In this article we are going to approach the same theme from a different angle and there are vast differences between both rankings of hardware stocks.

Our Methodology

To make our list of the top hedge fund hardware stock picks, we ranked personal computing, semiconductor, and computer hardware by the number of hedge funds that had bought the shares in Q1 2024. Out of these, the stocks with the highest number of hedge fund investors were selected. Basically our article listed the best hardware stocks to buy according to the 900+ equity hedge funds tracked by Insider Monkey. Why do we care about what hedge funds do? 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).

A technician in a server room managing a large-scale network of computers.

Arista Networks, Inc. (NYSE:ANET)

Number of Hedge Fund Shareholders In Q1 2024: 69

Arista Networks, Inc. (NYSE:ANET) provides networking hardware products used in AI applications. The firm has been doing well financially, as it has beaten adjusted analyst EPS estimates in all four latest quarters. Like other AI stocks, Evercore ISI was quite bullish on Arista Networks, Inc. (NYSE:ANET) in a May 2024 analyst note. This note saw a price target increase to $340 from $320, along with the reiteration of an Outperform rating. Evercore believes that Arista Networks, Inc. (NYSE:ANET) can meet its target to bring $750 million in revenue by fiscal year 2025, allowing it to compete with AI king NVIDIA on the networking hardware front.

As March 2024 ended, 69 hedge funds tracked by Insider Monkey were Arista Networks, Inc. (NYSE:ANET)'s stakeholders. Rajiv Jain's GQG Partners held the most valuable stake which was worth $881 million.

Like other AI stocks, Arista Networks, Inc. (NYSE:ANET)'s forward P/E ratio of 41 shows that investors expect it to grow faster than the benchmark S&P 500. At the firm's latest earnings call, CEO Jayshree Ullal talked about the importance of networking in the AI era as she outlined:

We are witnessing an inflection of AI networking and expect this to continue throughout the year and decade. Ethernet is emerging as a critical infrastructure across both front-end and back-end AI data centers. AI applications simply cannot work in isolation and demand seamless communication among the compute nodes consisting of back-end GPUs and AI accelerators, as well as the front-end nodes like the CPUs alongside storage and IPWAN [ph] systems as well. If you recall, in February, I shared with you that we are progressing well in four major AI Ethernet clusters that we won versus InfiniBand recently. In all four cases, we are now migrating from trials to pilots, connecting thousands of GPUs this year, and we expect production in the range of 10K to 100K GPUs in 2025.

Overall ANET ranks 14th on our list of the best hardware stocks to buy. You can visit 15 Best Hardware Stocks According to Hedge Funds to see the other hardware stocks that are on hedge funds’ radar. 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.

 

READ NEXT: Analyst Sees a New $25 Billion "Opportunity" for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

 

Disclosure: None. This article is originally published at Insider Monkey.