Tuesday, October 25, 2022
You could forgive data-center landlords for feeling the digital boom has passed them by.
After all, cloud-computing usage skyrocketed during the pandemic and the Great Resignation. More than five million new businesses were formed in the blink of an eye, many of them online enterprises.
This stat says it all: at the height of the shutdowns, there were some 300 million online-video calls, per day. All that data, voice, and video travelled though cloud-computing centers, an industry that was worth $187.35 billion globally in 2020.
But here’s the thing: data from FactSet shows that data-center rents are stuck in neutral, and stocks from the sector are lagging the broader market.
Investment interest in this sector is low — but for contrarians, that can create profit opportunities.
And that’s why, today I’d like to let you know about a particular company…
It’s a data-center supply firm focused on sophisticated switching gear.
And over the next few years, it’s poised to double its earnings…
FactSet says data-center rents are weak because of growing supply, and because of powerful tenants like Amazon that demand favorable pricing.
But irony abounds. After all, web traffic is only going in one direction: up. In fact, analysts say Internet traffic doubles every four years.
And in the U.S., web traffic is picking up steam. For example, thanks to last year’s bipartisan infrastructure bill, the government is investing $65 billion to expand access to high-speed Internet across the country.
As you can imagine, that will drive up demand for data centers considerably.
And this is where a specialty data-center supplier comes into the picture…
It’s called Arista Networks Inc. (ANET).
Arista makes high-speed network equipment. This is the kind of gear that data centers rely on so they can connect multiple servers with each other and with the Internet — without creating logjams that slow it all down.
The company was founded in 2004 by Andy Bechtolsheim, a co-founder of the storied Sun Microsystems. Andy’s co-founder is David Cheriton, a data scientist and venture capitalist with years of experience at Cisco Systems Inc., another Silicon Valley legend.
These seasoned, savvy leaders know a thing or two about spotting big and highly profitable trends.
Arista’s biggest source of revenue is ultra-fast switches — small boxes that route traffic to the exact server it needs to go to at lightning speeds. It may sound simple, but in data centers, switches need to handle so much data, so quickly, that it takes highly specialized equipment to do it right.
The firm’s switches can route a stream of information to the right destination in under 500 nanoseconds. That’s just 500 millionths of a second.
No wonder, then, that Arista’s two biggest clients are cloud giants Microsoft Corp. (MSFT) and Meta Platforms (META). Both rely on the speed and reliability of Arista’s switches and equipment to power the next-generation of cloud computing, video, AR/VR, and much more.
But it goes further than that…
As you can imagine, the speed offered by Arista switches is also tempting for Wall Street traders who need their trades to hit the stock exchange faster than their competition’s. That’s why the financial industry is another huge source of revenue for Arista.
But Arista does more than network switches. It also provides a full suite of monitoring and protection tools and software for network equipment.
At the high throughputs and speeds of a data center, having these tools custom-built for the equipment is crucial to keep operations running smoothly. Especially as the granular data that Arista’s tools provide allow for stability and safety to be monitored automatically, using AI tools.
AI has become an absolute necessity for running data centers across the globe. That’s why Arista works with its clients to customize these tools and develop AI for their specific needs. This saves time and headaches for companies that would rather get on with optimizing their operations than trying to figure out how their equipment works.
As an added bonus, Arista also makes equipment for “the edge” of networks — switches and WiFi routers that companies use in their offices for local computing needs.
This means companies can use Arista’s equipment in the office, data center, and store. Collating and comparing the data across operations using Arista’s custom-built AI can lead to big discoveries in how to optimize a business.
With the breakneck growth of Internet traffic and data-center usage, it’s no wonder Arista’s earnings have been improving lately. In the company’s most recent quarter, Arista announced earnings of $1.08 per share.
That was a whopping 59% higher than the year before, and beat the expected $0.92 per share.
It also beat on revenues, coming in at $1.05 billion instead of the expected $979 million. Not only was that 49% higher than the year before, but it was also the first time the company had made more than $1 billion in revenue in a quarter.
The company also raised forecasts for the future. Wall Street was expecting $996 million for the third quarter. But Arista recently upped that to a range of $1.025 billion to $1.075 billion. It will report results on Oct. 31.
With that in mind, I’m now projecting Arista’s earnings will grow by 22% a year. At that rate, earnings will double in just a little over three years.
Add it all up, and you can see why I say this is the kind of digital investment that can boost your net worth.
Even if you’re being cautious with your investments in today’s choppy market, you should definitely put this winner on your wealth-building watchlist.
Cheers and Good Investing,
Chief Investment Officer
Trend Trader Daily