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S&P 500 technology stock Arista Networks (NYSE: ANET) has been a brilliant investment in recent years, rising more than six-fold. However recently, it has pulled back a little.
Given this pullback, I decided that it was time to buy a few shares for my ISA. Here’s why I bought it.
A new growth stock for my ISA
Arista Networks is a leading provider of cloud networking solutions. It specialises in switches (boxes full of ports) that can move vast amounts of digital information between servers at lightning speed and also offers a network operating system.
Today, its products are used by all the big cloud companies (Amazon, Alphabet, etc). For these companies, Arista’s solutions help them manage massive amounts of data with low latency and high reliability.
Why did I buy it now?
As for why I bought it, there are a few reasons. One is that recent Q1 earnings (which the wider market was unimpressed with) looked pretty good to me.
For the quarter, revenue was up 35% year on year to $2.7bn. Meanwhile, non-GAAP earnings per share were $0.87 versus $0.66 a year earlier.
Arista is off to a strong start in Q1 2026.
Jayshree Ullal, Chairperson and CEO of Arista Networks
Notably, numerous Wall Street analysts increased their price targets for the stock after the earnings report. Some firms went to $200 (more than 40% above the share price when I bought it).
So, it struck me that there was a disconnect between analyst sentiment and the share price action. I decided to capitalise on this.
An AI capex beneficiary
Another reason is that I expect the strong growth here to continue in the medium term as hyperscalers spend big on AI. After spending over $700bn this year, analysts believe that these tech firms could be set to spend over $1trn next year.
This should benefit Arista because as I said above, its products are used by all the big cloud companies.
A high-quality business
I’m also attracted to the quality of this company. This is a business that’s very profitable.
Over the last five years, return on capital employed (ROCE) has averaged 27%. Companies that have high ROCEs and a source of growth tend to be good long-term investments.
How’s the valuation?
Finally, I could justify the valuation. When I bought, the forward-looking price-to-earnings (P/E) ratio using next year’s earnings forecast was in the low 30s.
Now, obviously that valuation is still high. And it adds risk for me.
If revenue growth slows, the shares are likely to underperform given that lofty earnings multiple. And it could slow – hyperscalers may decide to pull back on data centre spending.
Taking a three-to-five year view, however, I’m excited about the potential here. I believe this stock is worthy of further research.
Edward Sheldon has positions in Arista Networks, Amazon, and Alphabet.
This story originally appeared on Motley Fool
