Pick Arista Networks Stock Over Palantir?

Question: Why would you pay over 160x forward earnings for Palantir stock (NASDAQ:PLTR), when you can buy Arista Networks stock (NASDAQ: ANET) for a little over 30x? You wouldn’t, especially when you consider these simple facts:

1. Growth: Palantir’s revenue rose at an average of 23% each year over the last three years, below Arista, which grew by 33% per year over the same period. Consensus projects that PLTR’s growth could pick up a bit this year to 30%, compared to 20% for ANET.
2. Margins: Arista Networks’ adjusted net margins exceed 40%, so more of that top-line growth makes its way to shareholders. This compares with Palantir’s 34% margins over the last year.

Is Arista A Safe Bet?

While the term “safe haven” might come to mind for some, Arista Network’s past performance during market shocks suggests otherwise. For context, here’s how Arista has behaved in past shocks. During the 2022 inflation shock, ANET dropped over 37%. In 2020, amid pandemic uncertainty, the stock fell 34%. So, ANET stock is not exactly a safe stock despite its fair valuations.

However, it’s important to note that ANET stock has already experienced a significant correction, falling from a high of close $129 at the beginning of the year to about $71 now partly due to the impact of the U.S. tariffs on key trading partners. For investors seeking a potentially more stable and high-performing alternative, consider the Trefis High Quality portfolio. This strategy has outperformed the market with over 75% returns since its inception, as demonstrated by its HQ performance metrics.

AI Networking Lynchpin Vs. Big Data Specialist

If you generally believe AI is here to stay and flourish, with or without tariffs, Arista Networks could be a solid long-term bet given its current valuation. Arista is a leader in connectivity and networking solutions for artificial intelligence, with its ethernet switch market that the company leads is seen as a crucial area of spending in the AI space, as these workloads require high-bandwidth, and low-latency infrastructure. Moreover, as AI model sizes grow, networking is likely to become a bottleneck rather than compute power itself, meaning that investments could continue for a long time.

The major U.S.-based hyperscalers are doubling down on their AI spending, and Arista is well-positioned to benefit from this wave. As model sizes continue to grow, networking investments are likely to remain strong for years to come. By investing in Arista Networks, you’re not betting on any single company like OpenAI, Google, or Amazon to win the AI battle. Instead, you’re investing in the underlying infrastructure all these companies rely on. The AI race is still in its early stages, and companies are investing heavily. For example, Google’s tech infrastructure CapEx is now around $75 billion, reflecting the scale and urgency of this shift.

Palantir is a good company too, although its valuation is very rich relative to its growth. Moreover, revenue is heavily reliant on government contracts, which are often lumpy and uncertain, and could face headwinds if global geopolitical tensions ease under the new Trump administration. While the company is growing its commercial business rapidly, its large deal sizes and complex implementations may limit broader adoption among smaller firms. Margins, though strong, could come under pressure if Palantir expands to a broader customer base or faces pricing competition from tech giants like Microsoft.

What could go wrong? Well, Arista’s earnings might disappoint. Revenue growth is also likely to slow this year from an average of over 30% in recent years to about 20%. The imposition of tariffs by the Trump administration on trading partners, including China, is likely to have ripple effects through Arista’s supply chain. As these tariffs on Chinese goods take effect, the increased costs will need to be absorbed at some point. For Arista Networks, this could translate to a squeeze on profit margins and earnings.

Then there is the unexpected, unimagined. Do not touch this stock if you can’t stand another 20% or 30% downside from here. The worst thing you could do is sell at that point. Instead, talk to an adviser who’s seen four bear markets in the last 30 years about Trefis HQ strategy and other clever ways you can take advantage of a market downturn. Clue: Much money can be made in this market if you don’t lose your mind. All said, if you’re a long-term investor and want to invest and forget for the next 3-5 years, Arista right now could be an interesting entry point.

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