Investing in Intelligence: AI Stocks and Options

AI Stock Analysis on $ANET - Arista Networks as an Artificial Intelligence Investment

• Investing in Intelligence • Episode 1

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Want to invest in AI stock ANET? Our hosts discuss Arista Networks ($ANET) and its role in the AI industry. They evaluate the company's position in the market, comparing it to competitors like Cisco and Nvidia. While James expresses long-term bearishness on Arista Networks (ANET), citing concerns about its growth potential and competition, Kai sees it as a good company with consistent growth and suggests including it in a diversified AI portfolio. They also share their views on the overall market and the future of AI investments. 

ANET as an AI Stock - Episode 1 Outline:

00:00 Introduction to Arista Networks (ANET)
02:23 Discussion on Arista Networks' Role in AI
06:15 Comparison with Competitors
08:18 Evaluation of Arista Networks' Position in the Market
10:45 Short-term Bullishness on Arista Networks
13:18 Concerns about Arista Networks' Growth Potential
15:00 Diversification in AI Portfolio
23:17 Market Outlook and AI Investments
25:07 Closing Remarks and Future Episodes




James (00:01.55)
All right. Welcome to the investing in intelligence podcast, where we talk about artificial intelligence companies, stocks and trading. I'm James here with my co -host Kai. And today we'll be talking about Arista networks, AKA a net owner. Mind you that the opinions expressed on this podcast are just that opinions. They should not be taken as specific advice to invest in a particular way. Arista networks engages in the business of cloud networking solutions.

The firm is also involved in switching and routing platforms and related applications. And they, like many companies are trying to paint themselves as an AI company. All right. So I'm going to start off and talk a little bit about my take on a net. And then we'll hear a little bit more from Kai. So. Disclaimer, I do not have.

a position in a net right now. So I neither own nor do I have a trade open in a net I did previously and I sold immediately after their last earnings. We are curling in Q1 of Arista's 2024. If it maintains a PE of 37, the high analyst price target would take us to 312 and the average analyst estimate for earnings for the year would take us to 277. So the way I get to that number is taking their current PE of 37.

multiplying it by the average analyst estimate for earnings for 2024, and then multiplying it by the high analyst estimate of earnings. So that's a range of 277 to 312, and current stock price is 288. So I personally am short -term bullish on Arista, and the reason is because I think that everyone right now is buying anything and everything that has anything to do with AI. So if they hear the word AI,

than they buy, especially when they think it's a pick and shovel play, which people seem to think Arista is. So I'm short -term bullish on Arista because I think up until the next earnings call, I think everyone's just buying anything that has to do with AI. And they seem to think Arista is a central player. They seem to think Arista is making switches and cables and things like that that are a pick and shovel for the expansion of AI and cloud computing.

Kai (02:22.892)
pick and shovel. You hurt my feelings, James. You know, what's interesting is if you remember previously, I brought Arista Networks to your attention. Hi, I'm Kai. I'm so stoked about this podcast. It's been a long -term dream of mine to get on camera with the young Dr. James here, but I'm super stoked. I remember bringing Arista Networks to his...

James (02:23.246)
I am long -term bearish. Go for it, what?

Kai (02:51.98)
his attention previously and picks and shovels brings me back to like 2000 years ago. Maybe, maybe like 500 years ago, James. I think Arista network is, is not at that old.

James (03:07.502)
So Arista Networks, you know, I heard someone say the other day that the Spear was a new technology at one point. And so AI is a new technology. We don't really understand what's a pick and shovel and what's not a pick and shovel. So for example, one of the big lines that Jensen Wong, the CEO of NVIDIA is using on his conference calls is saying that he is not a pick and shovel, that his GPUs are not a commodity.

because there's 36 ,000 parts that goes into it and something cannot be a commodity if it has 36 ,000 parts. So corn is a commodity, oil is a commodity, but something that has 36 ,000 parts is not. Now, I actually think what Anet makes is a commodity. Their switches, their ethernet technology, I actually believe that is a commodity. So if you want to worry about picks and shovels and too much competition and things like that, I would worry about Anet, not Nvidia at this point in time. But...

That's partially why I'm long -term bearish on Arista. The other reason is just that the pick and shovel that they're making, NVIDIA already has a solution for that. So there's InfiniBand and there's Ethernet, and Arista focuses on Ethernet. Previously, when they were putting together these AI clusters, they wanted, so putting together AI clusters with NVIDIA chips or other chips,

for accelerated AI computing, they usually wanted to use InfiniBand rather than Ethernet. Well, okay, once again, so ANET makes Ethernet, not InfiniBand. InfiniBand is proprietary to video. Go ahead.

Kai (04:48.012)
Yeah, so can you clarify something? So I'm the average investor. Can you explain to me just in general, what does Arista Networks do? Who are their clients? And what is it exactly that they're selling in the AI space? Well, let me start with that for me.

James (05:07.566)
Okay, so I can't explain any more than I know, but what I can tell you is they're involved in switching and connecting GPUs, and they also have their own proprietary software that helps with networking. So yeah, so they do a number of different things, but I would say that they mainly focus on switches, connectors, and they do have a proprietary software for operating the GPUs as a cluster.

Now that brings up another issue, which is their software. So not only is their Nvidia software to compete with their software, which I expect to win, but there's also what we call white box software solutions, which are generic open source free solutions. So why would you pay Arista for their solution if you can either pay for the better Nvidia software or not pay at all for a white box solution. So.

Yeah, I mean, my main barricade, my main barricades for a longer term on Arista is just that Nvidia beats them. Yeah. Did you want to respond?

Kai (06:14.028)
Would it be safe to say, yeah, so would it also be safe to say in my understanding, correct me if I'm wrong, is one of the main things Arista Networks does is build up cloud networks. So these chips that Nvidia sells goes to these companies, but the one thing in Arista Networks does as well as potentially a competitor is build out these cloud networks for this AI development. Is that correct or correct me if I'm wrong?

James (06:43.854)
I don't think so. I think Arista is selling the picks and shovels. I think that SMCI is putting it together on racks and selling that. I think Cloudflare is creating a regional, a multi -region data center, AI data center. And there are other companies that of course do data centers, data warehousing. But no, I think Arista is literally selling the picks and shovels, the connectors, the routers.

the software that things are based on. So yeah, I mean, like I said, I can't explain anything I don't know. So I'm not as technical as maybe a computer science expert would be, but from what I understand, they're doing switches and connectors and software to run as a base layer. So, you know, Nvidia does all the same things. Cisco does some of those things also. I would bet on Nvidia.

Kai (07:40.588)
See, so one of Arista Network's main competitors is Cisco, correct? And so what I'm understanding from you is that, well, if you're bearish long -term, you're bullish long -term on its competitors, one of those competitors you're saying is Nvidia. So they do the GPU chips as well as software, but you're saying that they're gonna build out some of these cloud networks with.

the particular as you're using picks and shovels that are risks and networks. And so essentially you're not going to need a risk of networks anymore. Is that, is that what you're saying? Is that under my understanding that correctly?

James (08:18.094)
Yeah, so, you know, when we look at the old way of describing it was basically that Arista had more high performance parts than Cisco. So right now I'm showing, I believe this is a Morningstar bull versus bear comparison. So you see what they say here. We see heightened investment and competition from Cisco in Arista's core high -speed market, which may make growth and market share gains more difficult.

Arista has a weaker position in areas of networking outside high -speed switching and may struggle to expand into adjacent markets. But then sometimes I kind of say the opposite thing that you said for the bull case. So they say here, Arista has gained a top market share position in high -speed switching, resulting in our view from technology leadership. I frankly disagree with that a tad bit. So the way I would put it would be that NVIDIA,

and InfiniBand have the whole position in high speed switching rather than Arista. So, and if you consider that most people are working with Nvidia directly, then most people are gonna buy Nvidia's add -on solutions like they're switching. Yeah.

Kai (09:32.524)
Yeah, yeah. So bearish in the long term, are you bullish in the short term on Arista Networks? Arista Network right now is quite above its 21 day EMA. Moving average is 21 day moving average. It's almost at 290. Are you bullish in the short term?

James (09:50.286)
Yeah, I'm glad you asked that because there are two things I can say in regards to that. So first of all, I'm bullish up until April 29th, which is their next earnings. But at the same time, let's just compare it to other stocks. So Arista today was up 3 .69%. Okay. So once again, Arista up 3 .69 % today, NVIDIA up 4%, the SMH Semiconductor ETF up 4 .05%, SMCI up 4 .5%, Pure Storage up 5%.

could go on TSM Taiwan Semi up 4 .06 % so they're being outperformed by a whole host of other ASML of 4 .13 % Broadcom up 7 .59 % so why am I buying Arista why am I buying Arista when all these other amazing AI stocks are outperforming on a daily I mean this is just one day that I'm just looking at one day of we're go ahead

Kai (10:41.388)
Yeah.

Well, so you're bearish across the board. That's what I was trying to understand. You're not bearish in the long term. Yeah, so James doesn't own any Arista Networks. We had talked previously about Arista Networks. I'd like to just point a few things out. And just for the basic investor, and we're all trying to learn. And so from 2021 to 2023, Arista Networks earnings per share has been stellar. I mean, your 31 % growth.

James (10:47.278)
I don't own it. Yeah, I mean, yeah.

Kai (11:12.236)
62 % growth, 54 % growth, that's steady growth in EPS. And so one of the things that just to get down to the basics is to learn to evaluate sort of the macro economics of the company would be, I look at EPS growth over time. Also, I like to look at its net profit margin, which is essentially the revenue of the company minus the cost of the company divided by the revenue. And its net profit margin last year was like around 40%.

I like to look at its assets, its liabilities. It's got almost $10 billion of asset and around $3 billion of liability. So it's steady growth, good net profit margin. It also has, I like to look at one of the things I like to trend is its book value per share, as well as that price to book ratio. And you've seen, and I've seen steady...

book value per share growth over the last four years. So as a company, it's growing, it's doing really well. It's had very good growth and its last two earnings calls. One, it jumped about $30 per share. It's most recent when it dropped $30 per share, but it had a little sniffle in its earnings. I mean, it posted really good EPS. It was in line.

better than expected, but it wasn't perfect. And so it dropped. So I have a difficulty in seeing a complete bear case per se on it. What I'm hearing from you, and would this be safe to say that it's not having the growth of 200 % that Nvidia has of EPS in one year?

So what is your standard here? Is 40 % not a good enough standard? Is 30 % not good enough standard? I mean, what are you really wanting out of a stock of a good company to buy? I mean, explain to me that. Is it just not good enough 40 % for you?

James (13:18.094)
Yeah, well, I should pull up their actual earnings report and kind of I would like to know quarter over quarter. So there was there was something there is report I didn't like. Now, this was the report was some weeks ago. I don't remember everything that was said, but definitely in the earnings call, I was unimpressed. The CEO exact words from the CEO were AI is coming. It's just not here yet. And I fundamentally disagree with that statement. AI is here. So what the CEO meant to say was that

AI is here now, it's just not here for us yet. So AI is here now for Nvidia, for SMCI. SMCI had to increase their earnings estimates before it was even earnings. They had to like literally pre -announce that they were going to make way more money than they expected. So some of these companies are having explosive...

growth, whereas Arista is not. And the CEO openly admits that in the earnings call, the CEO says, not yet, but that's an excuse. Saying AI is not here yet is an excuse for the fact that they're not competing, in my opinion. So what I would say is that I'm concerned about the next earnings call. I'm concerned that, I mean, you're right, we've had a good increase in the share price over the past weeks, but, and months.

But I would be more concerned about what happens after next earnings if they miss. Because right now, everyone in the market is trying to sniff out what are the real AI plays and who is the imposter. So that's what I'm trying to do too. I'm concerned that Arista might be an imposter.

Kai (14:58.828)
Well, I think I don't think you could call them imposter. I mean, $10 billion of asset, 6 .58 EPS is not an imposter. Now it's not billions and tens of billions of dollars of revenue that some of the other AI plays have, but to call it an imposter, I think is a little harsh. I see what you're saying. James would like

to see incredible growth in an AI play. And Arista networks may not provide you with 200 % growth of revenue in a year. However, what are your feelings? What are your feelings real quick? What are your feelings as far as diversification in AI? Is Arista networks not in a diversified AI portfolio?

James (15:40.078)
So I see one point.

Go ahead.

Kai (15:52.108)
Are you keeping it in your portfolio? You don't own it. Or you would you add it? Obviously, I think the answer to that is no. But what if you're, what if an investor is saying, Hey, James, I don't want to put all my eggs, so to speak in a SMCI and video. I would like to go into sort of these cloud networking companies that help develop or set up these cloud networks for some of these companies and invest in a particular space. Where are you putting?

your diversification investment, are you putting that at all in the cloud networking space? Or what I'm hearing from you is that you would just stay with Nvidia or some of the other companies.

James (16:34.542)
So first of all, I should just say for their Q4 earnings, it looks like their EPS was 2 .08 versus an estimate of 1 .71. So earnings per share, they did beat significantly. Sales was 1 .54 billion versus an estimate of 1 .54 billion. So they didn't really beat on sales. And if I remember correctly from the earnings call, I think some of the analysts were trying to figure out how...

EPS was so good despite lackluster sales growth or something like that. If I remember correctly from the earnings call, there was a little bit of confusion and there was like an improvement in margins or something like that. There was something that, I don't want to say the numbers look better than they really were, but let's just say I'm skeptical of their ability to have the explosive growth. Now, to get to your question, skeptical, to get to your question about

Kai (17:24.684)
James remains skeptical.

Would you agree that just the macro economics look good for Arista Networks? Just the EPS growth over the last four or five years, just the sharebook value? I mean, you're still talking a price to book ratio of 30. And for all those out there, explain to them, James, real quick, why EPS, earnings per share, or a PDE ratio of a company and investing...

James (17:36.046)
The micro.

Yeah, well I haven't learned, I mean...

Kai (17:55.692)
in these AI companies is either a good or poor metric. Why would, you know, let's say an investor saying, I want EPS over the last 10 years. I want to see a good EPS growth over the last 10 years. And you know what? I don't see this AI company having it. So that's how I invest. Please explain just EPS and what that may mean for an AI company.

James (18:19.854)
I mean, I think investors reward growth more than they do anything else. So the example, the best comparison would be Apple. Apple has great cash flow, great cash on the balance sheet, but they're not growing that much. So the stock is going down, analysts are downgrading it. So yeah, I think growth is kind of what people want to see most. So if you get EPS growth,

For the, let's say, let's say PE stays the same. Like we were just talking about a set PE of 37 for Arista. Let's say the PE ratio stays at 37. If we get EPS going up, well, that means the price should be higher. So the price target should be higher because what we do to calculate kind of the price would be their four quarters of EPS times their PE ratio or whatever PE ratio you think they should have. So yeah, if EPS goes up, technically the price of the stock should go up. Yeah.

So growth is kind of what investors reward most for a company. But I do want to answer your other question previously. We'll start wrapping up in a minute here, but I wanted to answer your question. You said you were asking about kind of like, well, how do you structure an AI portfolio, which is kind of the heart of why we're doing this podcast, because investors are struggling to know which stocks are really AI stocks. And every company on their earnings call is mentioning the word AI. So technically everything could be an AI stock right now. But...

Early on, people were focused on the picks and shovels. Now there's more companies like ServiceNow that are saying that they're benefiting from the software side of AI. Microsoft, of course, is trying to benefit from the software side of AI. So I think you have a mix, but I think you have to vet these companies based on their earnings beats, their earnings and their guidance. So are they beating on earnings? Are they beating on guidance? Are they beating on revenue? Are they beating on these things? And then also, if you want to be a bit more granular, go listen to the earnings call.

I'm doing that for all of my 2020, 2023, 2024 core AI holdings. And that's why I don't have conviction in Arista, but I do have conviction in other things like Cloudflare and Nvidia and SMCI. Does that answer your question?

Kai (20:31.308)
We plan to cover a lot more of these different companies in the future and wanted to start with Arista Networks. Yeah, I think would this be accurate to say Arista Networks is a really good company, especially over the last five years. It's shown consistent growth. If you can take the pain, I mean, for those of us after earnings that owns shares of Arista Networks and could deal with the pain Arista Networks is,

is way above its 21 day EMA. However, would it be accurate to say you would like to see more revenue growth over a shorter period of time than Arista Networks is showing with its AI competitors, and so therefore you're not choosing Arista Networks for your portfolio? Is that what I'm hearing?

James (21:21.486)
Yeah, I want to see more revenue growth. I want to see more revenue growth. I want to see a better beat on a top line, bottom line. I want to see a CEO who's enthusiastic, a CEO who is not telling us that explosive growth is going to come somewhere down the road, but saying that the time is now. Our time is now. That's what I want to hear on an earnings call.

Kai (21:43.372)
Yeah, I want to see a CEO wearing a hoodie with Arista Networks, you know, like an investment hoodie. So for the listeners out there, I think James's points are extremely valid. I think I would add it to a diversification portfolio. I think Arista Networks is going to continue to show growth. There are competitors, Cisco being one of them, but Arista Network does build out these cloud networks for very large.

James (21:47.214)
Thank you.

Kai (22:12.076)
AI players. And so I think that keeping it in your portfolio is very reasonable. But look at the basics of these companies. And one of the things that James may not have said is that a lot of these AI companies don't have five years of EPS to show. This is a very new thing. I mean, I think AI is going to make the dot com era, for example,

look incredibly small. Well, we're in the beginnings of something that is, and yet to determine the growth and a lot of these companies. I don't know if I'm saying that correctly, but you can't really judge some of these new AI companies. And that's something that I've learned. For example, in video, you don't have three or four years of data to look at it's astronomical growth over a short period of time. And I don't think there's anything wrong with keeping Arista networks in your portfolio. I'm bullish on Arista networks.

James (22:49.804)
Yeah.

James (23:02.178)
Yeah.

Kai (23:08.756)
in the long term, and even in the short term. But yeah, what do you think of the market? You know, this last week, especially with the core PC coming out, what do you think of the market? Yeah, what do you think? What do you think of going on? What do you think of the AI play?

James (23:17.742)
Yeah, let's do, so let's both do 45 seconds. Let's both do 45 seconds on our overall view of the market and the market as a whole and then AI. So I literally, I want to keep it to like 45 seconds or a minute, but I'm starting my time. So my take on the market is that CPI, PPI were a bit higher than expected. So that adjusted the expectations for PCE. PCE was in line.

I think we're going to go sideways or down for the coming weeks. I don't know for sure. I mean, I guess I don't want to say that. I want to say the market is looking for a reason to pull back because we've had such a run over the past months. The market is looking for a reason to pull back, but we just don't have the reason. There is no reason to pull back. So you've got the bears looking at state by state unemployment numbers. I think we move sideways, maybe a little up, maybe a little down, but I don't see any big moves coming until we have more inflation data.

until we have another Fed meeting. I don't see that happening. So that's my 45 seconds. You go ahead and give me your take.

Kai (24:20.812)
Yeah, interesting. I mean, we had a, uh, of course he, uh, the PCE fell in line and so up, up and away today, I actually expected a little sideways movement. I think the market moved sideways. I think we had a great February, um, great January. I think we moved sideways for a little while, but gosh, I mean, this with AI and everything, it's hard to judge. Um, informational technology sector is 9 % over the last month. The consumer discretionary I think was the only thing close at 8%. So as a sector.

We're up, up and away. Arista Networks, it's 21 day EMA is 270. It's almost at 290. It's 200 day moving average is 200. And so we're quite away from the 200 day. I think we're going to go sideways a little ways and then up, up and away from there.

James (25:07.576)
All right, sounds good. So we're gonna go ahead and close out there. Thanks for listening to our podcast. Please give us a rating, review, like, or comment, and we'll be back in our next episode to cover something we haven't decided yet. So we'll discuss that and figure out what we're gonna cover in our next episode.

Kai (25:23.66)
I expect an AI play hoodie with Arista networks on it next time, James, we talk, you know, I'm looking forward to the next companies we're talking about. It was a great time. I was stoked that this is one of my lifelong dreams. I'm now marking something off my bucket list to do a podcast with James here. So.

James (25:40.942)
You're really bringing in the first episode love. All right, so you can find all our holdings and trades at investingintel .ai. If your first language is Chinese, Japanese or Arabic, you can also find our podcast in those languages on YouTube. I didn't tell you, Kai, previously that we're gonna do AI translation to three other major languages, but we're gonna do that too. So yeah, so we'll go ahead and, no one needs Duolingo anymore because of AI. All right, we'll close out there. Thank you so much, Kai. See you next time.

Kai (26:00.236)
Duolingo.

Kai (26:05.224)
Maybe true. Thanks James. Have a good one.