Meta Slows Arista Spend: Buy Opportunity or Overreaction?

Published Date : 28/02/2025 

Meta Platforms' reduced spending with Arista Networks caused the stock to plummet. However, with Meta's capital expenditure plans for 2025 focusing on AI infrastructure, is this a buying opportunity for investors? 

When one or two customers contribute a significant portion of a business's revenue, it can be a double-edged sword.

The supplier must maintain strong relationships and sometimes even offer concessions to these large clients to ensure business continuity.

This scenario played out recently with Meta Platforms (META) and Arista Networks (ANET).

Meta, previously Arista's largest customer, cut back on its spending in 2024, leading to a significant sell-off in Arista's stock.

It is now trading around 25% below its all-time highs.

But is this reaction justified?

Arista Networks provides data center networking solutions to companies that need to transfer information between data centers.

While there are numerous businesses with global data centers, few can match the scale of tech giants like Meta.

Therefore, it's not surprising that a significant portion of Arista's revenue comes from a small client base.

This situation is similar to GPU maker Nvidia (NVDA), which also has multiple clients each contributing over 10% of its total revenue.

However, the issue for Arista is that Meta reduced its spending last year.

In 2024, Meta accounted for 14.6% of Arista's total revenue, translating to approximately $1.02 billion.

In 2023, Meta's contribution was higher at 21%, or $1.23 billion.

Does this reduction mean investors should panic? Not necessarily.

Arista's management attributes the decline to Meta's Year of Efficiency in 2024, where Meta curtailed its capital expenditure spending, although it picked up again in Q4.

Despite the recent cutback, Arista expects its sales with Meta to recover this year.

Meta has announced capital expenditures of between $60 billion and $65 billion for 2025, with a significant portion allocated to AI infrastructure.

Arista is poised to benefit from this spending, which bodes well for its future.

Arista projects 17% revenue growth for 2025, a figure close to the 19.5% growth it achieved in 2024.

Given this, the market's initial reaction may have been overblown, presenting a potential buying opportunity for investors.

Despite the stock's decline, Arista is not cheap.

It currently trades at about 37 times forward earnings, a level last seen in September 2024.

This valuation is relatively high, especially when compared to other tech stocks growing at similar rates.

For instance, Nvidia, which operates in a comparable market, projects Q4 revenue growth of 73% and trades at 30 times forward earnings.

However, Arista's high-quality products and strong client relationships make it a compelling choice for those considering a small position.

Investors looking to capitalize on the sell-off should consider building their positions gradually.

The stock price could still decline further until positive news from Arista emerges. 

Frequently Asked Questions (FAQS):

Q: Why did Meta Platforms reduce its spending with Arista Networks?

A: Meta Platforms enacted a Year of Efficiency in 2024, which involved cutting back on capital expenditures. This led to a reduction in spending with Arista Networks, one of its major suppliers.

Q: How much did Meta Platforms' spending with Arista Networks decrease?

A: In 2024, Meta Platforms accounted for 14.6% of Arista Networks' total revenue, down from 21% in 2023, a reduction of about $210 million.

Q: What are Meta Platforms' plans for 2025 in terms of capital expenditures?

A: Meta Platforms has announced that it will allocate between $60 billion and $65 billion for capital expenditures in 2025, with a significant portion dedicated to AI infrastructure.

Q: Is Arista Networks' stock overvalued?

A: Arista Networks currently trades at about 37 times forward earnings, which is relatively high compared to other tech stocks. However, its high-quality products and strong client relationships justify its valuation.

Q: Should investors consider buying Arista Networks stock after the recent sell-off?

A: The recent sell-off presents a buying opportunity, but investors should consider building their positions gradually as the stock price could still decline further. 

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