Arista Networks (ANET) faced a sharp selloff in after-hours trading on Tuesday, with shares sliding 5.8% to $160.35, even as the company reported first-quarter results that topped analyst expectations. The data-center networking specialist posted a 35.1% surge in revenue to $2.709 billion for the period ending March 31, well above the FactSet consensus of $2.62 billion. Adjusted earnings came in at 87 cents per share, beating the 81-cent estimate.
However, the market's reaction was muted by the company's outlook for the second quarter. Arista forecast revenue of approximately $2.8 billion, which is essentially in line with Wall Street's $2.78 billion projection. Adjusted earnings per share are expected to be around 88 cents, versus the consensus of 86 cents. The lack of a significant upside surprise disappointed investors who had bid up the stock roughly 30% year-to-date ahead of the report.
Gross margin continued to be a focal point for analysts. The company's GAAP gross margin declined to 61.9% from 63.7% in the same period last year, while non-GAAP gross margin slipped to 62.4% from 64.1%. Non-GAAP operating margin held steady at 47.8%. The margin compression, driven by product mix and higher input costs, remains a key concern for the market.
CEO Jayshree Ullal described the quarter as "off to a strong start," emphasizing the company's unique position in secure cloud and AI networking. CFO Chantelle Breithaupt highlighted "disciplined execution" but cautioned that macro and supply-chain conditions remain "dynamic." The company maintained its 2026 AI networking revenue target of $2.75 billion to $3.25 billion, a range that investors are closely watching for signs of sustained demand.
Arista also unveiled new products aimed at AI data centers, including the XPO high-density liquid-cooled pluggable optics, which the company claims can reduce networking racks by up to 75% and floor space needs by 44%. The 7800-based AI spine is designed to handle heavy AI traffic, positioning the company to capture more of the growing AI infrastructure market.
The competitive landscape is intensifying, with rivals such as Nvidia, Cisco, and Hewlett Packard Enterprise's Juniper unit all vying for a piece of the AI networking business. Arista flagged potential risks including tariffs, parts shortages, heavy reliance on a key merchant silicon supplier, customer concentration, and heightened competition.
Despite the after-hours decline, some analysts remain bullish. CNBC's Jim Cramer recently said on "Mad Money" that he "would buy Arista Networks," calling it a key player that facilitates communication between machines in data centers. The company's stock ended the regular session down 1.4% at $170.22 before the after-hours drop.
Looking ahead, the market will be watching to see if management can demonstrate that AI networking demand continues to outpace expectations. With the stock already up significantly for the year, a standard earnings beat may no longer be enough to sustain the rally, especially as margin pressures and competitive threats loom.
