Morgan Stanley: Arista Beats Third-Quarter Expectations, AI Network Demand Drives Higher 2027 Outlook

How far did third-quarter results and the subsequent outlook exceed expectations?

Arista’s third-quarter 2026 revenue was 3.658 billion dollars, up 58.5% year over year and above Morgan Stanley’s prior estimate of 3.3 billion dollars. Non-GAAP earnings per share were 1.20 dollars, also above the bank’s estimate of 1.07 dollars.
Growth came primarily from cloud customers, while recognition of deferred revenue also helped, with the related balance falling from 6.9 billion dollars to 6.8 billion dollars. The company expects fourth-quarter 2026 revenue to grow 58.8% year over year and forecasts revenue growth of 38%–40% for 2027.
Morgan Stanley raised its 2027 revenue forecast from 16.002 billion dollars to 18.473 billion dollars and its non-GAAP earnings-per-share forecast from 4.78 dollars to 5.63 dollars.

The company raised its estimate of its addressable market to more than 220 billion dollars, from 105 billion dollars at last year’s analyst day. Morgan Stanley sees AI cluster scale-out networking as a major source of growth in 2027 and supportive of margins.
Arista said its scale-out business accounts for about one-third of its business in 2026 and expects the share to rise further in 2027. The company serves more than 100 AI customers and supports more than 10 accelerator types, which Morgan Stanley believes helps underpin its growth expectations.
Scale-up networking within clusters is an earlier-stage opportunity: the company expects to conduct some trials in 2027 and begin generating revenue in 2028. The opportunity becomes more attractive as clusters grow, but the bank remains focused on margins for early projects.

Third-quarter non-GAAP gross margin was 64.0%, at the high end of the company’s target range, while operating margin was 49.1%. Multiyear memory purchase agreements help the company manage component cost pressures, and it expects fourth-quarter gross margin to remain within its target range.
Morgan Stanley forecasts a gross margin of 63.0% in 2027, below its 2026 forecast of 63.4%. However, its 2027 operating margin forecast is 47.4%, above its previous estimate of 47.1%.
To secure supply, the company has made 11.4 billion dollars in purchase commitments, and management’s confidence in supply has improved. Meanwhile, inventory rose to 3.21 billion dollars at the end of the third quarter of 2026 from 2.535 billion dollars at the end of the second quarter.

The company set a 2027 campus business target of 2 billion dollars, up 60% from its 2026 target of 1.25 billion dollars. Morgan Stanley believes the business benefits overall margins and has room to gain further market share.
The bank is also monitoring whether enterprise customers have brought purchases forward because of price increases: enterprise purchases in the first half exceeded its expectations, while some hardware and networking vendors reported disappointing third-quarter results.
Morgan Stanley maintained its Overweight rating and raised its price target from 220 dollars to 230 dollars; its base case is based on approximately 35 times forecast 2028 earnings per share. The bank believes the AI growth outlook supports a valuation premium, while identifying cloud capital spending, component price increases and enterprise demand being pulled forward as risks.