Shares of Santa Clara, Calif.-based computer networking company Arista Networks Inc. (ANET) tanked over 9% on Friday following a bearish note from a team of analysts on the Street who expect Cisco Systems Inc.'s (CSCO) cloud-based rival to see its market share slip on the rising popularity of smaller, lesser-known providers.
Microsoft Seen Joining Shift to White-Box Switches
Industry research firm Cleveland Research downgraded ANET stock from buy to neutral on new competition to serve "hyper-scale" customers, such as Facebook Inc. (FB) and Microsoft Corp. (MSFT). Cleveland's Ben Bollin wrote a note arguing that big cloud and media companies are opting for off-brand, "white box equipment" from competitors. Additionally, networking giant Cisco, which has fought a long battle with Arista, is being "aggressive" in the pricing of its equipment.
This shift may be particularly painful for Arista, noted Bollin, as the tech company generated 16% of its overall revenues from Microsoft last year, as noted by Chief Executive Officer (CEO) Jayshree Ullal in February. The firm expects MSFT will account for 10% of ANET's total revenues this year. While the larger movement away from big switch makers to custom designs is nothing new, Microsoft's has historically not been a part of the trend. In late 2017, Stifel analysts noted that 90% of the white-box market is attributed to MSFT's two main public cloud competitors Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL).
Speculation that Microsoft may opt to build its own data center systems has prompted Arista's CEO to address concerns over the recent years. On the company's most recent earnings call, Ullal remained upbeat on the firm's relationship with its biggest customers, suggested that she hasn't seen any changes in regards to a shift to white-box switches.
Closing down 9.2% on Friday at $244.20, ANET shares reflect a 22% decline from highs reached in March at $311.67. The stock has returned 3.7% year-to-date (YTD) and 85.9% over the most recent 12 months, compared to the broader S&P 500's 0.7% gain and 14.1% increase over the same respective periods.