Arista Networks Inc. posted higher revenue and profit during the third quarter, but its guidance for the current quarter suggests sales growth will slow to a crawl on a sequential basis.

The cloud networking company reported earnings before certain costs such as stock compensation of 75 cents per share, surpassing the analyst consensus estimate of 72 cents, while revenue for the period rose 27% from a year earlier, to $2.31 billion, ahead of the $2.26 billion forecast. The earnings and revenue beat helped Arista to boost its bottom line, with net income of $853 million, up from a $748 million profit in the year-ago period.

Arista Chairperson and Chief Executive Jayshree Ullal (pictured) said the results prove that the company’s “centers of data” strategy is resonating well with both customers and analysts. “After yet another strong performance, Arista is well-positioned as a strategic networking partner with continued durable execution,” she said.

The company has enjoyed dramatic growth since the start of the artificial intelligence boom that kicked off in late 2022 with the emergence of ChatGPT. It has become one of the AI industry’s prime beneficiaries because it sells essential data center infrastructure such as premium network switches and high-performance routers, which are key to enabling higher bandwidth.

Arista’s networks are in big demand because most AI workloads rely on enormous clusters of graphics processing units that need to work in tandem with one another. As such, they need a blazing-fast networking infrastructure to support this, and that’s exactly what Arista provides. The company has built up an impressive customer base, serving major players in the AI industry like Meta Platforms Inc., as well as stock exchange operators such as Deutsche Börse and the world’s top racing league, Formula One.

However, the company’s guidance suggests it may be about to hit a bump in the road. It said it’s looking for revenue of between $2.3 billion and $2.4 billion in the current quarter. The midpoint of that range, $2.5 billion, is just ahead of the Street’s forecast of $2.33 billion, and would amount to growth on a sequential basis of less than 1%, down from 5% growth in the third quarter and 10% in the second.

Arista is also forecasting an adjusted gross margin of between 62% and 63%, which trails the Street’s estimate of 63.2%. Those numbers gave Arista’s investors plenty of food for thought, and some of them decided to bail on the company, sending its stock down 13% after-hours.

On a conference call, Arista executives explained that the slowdown is from problems with shipments rather than demand. They insisted that demand remains strong, but the company has not been able to ship everything it needs to keep pace with this. With regard to margins, executives said these could face pressure if its product mix leans too far toward AI and the cloud.

Still, analysts believe Arista is making encouraging progress on the product front that bodes well for its long-term future. During the quarter, the company launched the next generation of its network switch family targeted toward AI data centers, known as the R4 Series platform.

It’s an 800-gigabit-per-second system that’s designed to support high-capacity AI clusters. It sets a new milestone in terms of networking speed with its 3.2-terabits-per-second HyperPorts, while delivering superior energy efficiency to reduce the total cost of ownership.

“Arista’s leadership in the 800GbE switching market and its aggressive portfolio expansion are well-timed to benefit from a 90% average annual growth rate in this segment over the next five years,” said ZK Research analyst Zeus Kerravala.

Despite today’s after-hours drop, Arista’s stock is up almost 39% in the year to date, far ahead of the broader S&P 500 Index, which has gained just over 15% so far this year.

Photo: Morgan Stanley/YouTube