Arista Networks, Inc. (ANET) stock intrinsic value fair value estimate & owner earnings analysis

Arista Networks sells data-center and campus network switches, routers and related software and support, with roughly 64% gross margins. Fiscal 2025 revenue was $9.0 billion (up 29%), of which the Americas were 79%, Europe/Middle East/Africa 12% and Asia-Pacific 9%. Two customers were 26% and 16% of 2025 revenue, and those two accounted for more than 10% of sales in each of the last three years. The business is very profitable, holds no meaningful reliance on debt in our valuation, and grew net income from $184 million in 2016 to $3.5 billion in 2025. How we measure earnings. We start from operating cash flow, remove the swing from working capital, and subtract stock compensation as a real cost ($439 million in 2025). That gives owner earnings per share of about $0.14 in 2016, $0.61 in 2021, $1.37 in 2023, $1.83 in 2024 and $2.47 in 2025 (after 4-for-1 splits in 2021 and 2024). Working capital matters here: Arista's customers increasingly prepay under contracts with acceptance terms, so product deferred revenue added $2.45 billion to 2025 operating cash flow and $1.29 billion in 2024. We strip those inflows out rather than treat them as earnings. Roughly $120 million of 2025 capital spending was treated as $98 million maintenance and $22 million growth. Reported net income, plus depreciation, stock compensation, deferred tax and working capital, reconciles exactly to operating cash flow. Where we set the starting level. Because Arista has been re-scaled by cloud and AI networking demand since 2022, we look at 2023 through 2025 (median $1.83). Fiscal 2025 owner earnings of $2.47 rose about 35% from 2024. For the base case we start from the 2025 level, because the first half of 2026 confirms it: revenue was $5.74 billion (up 36%) and net income $2.24 billion (up 31%) versus the first half of 2025. We assume owner-earnings growth of 20% in 2026, below the 35% just achieved, then a taper. Base case (about $57 per share). Owner earnings grow 20%, 10%, 8%, 6%, 5%, 4%, 3%, 3%, 2% and 2% over ten years, reaching about $4.49 per share, then hold flat for a further 20 years. What is credited: the near-term growth is supported by results already reported in the first half of 2026 and by the growing product deferred revenue balance (contracts already signed and paid for, awaiting acceptance). The long flat tail reflects a decade of uninterrupted profit growth and switching costs of a network operating base. What is left out: market expansion in AI networking, share gains against larger rivals, and new-product launches, since none is secured today. Bear case (about $15 per share). Arista itself warns that customers may overestimate AI build-outs and cancel, delay or reduce commitments on short notice, that sales are made largely on purchase orders, and that contracts with acceptance periods create the possibility of returns. With 42% of revenue from two customers, we assume one large customer sharply cuts spending: owner earnings hold near $2.40 in 2026, fall to $1.70 in 2027 and settle at about $1.40 (the 2021-2025 median) for eight years, continue for five more years and then end. Bull case (about $87 per share). Owner earnings grow 30%, 18%, 14%, 12%, 10%, 8%, 6%, 5%, 4% and 3%, reaching about $6.84, if the current run rate of about 31% net income growth partly persists and current customers keep buying, then stay flat for 25 more years. This case relies on customers continuing to deploy what they have already committed to, not on a market recovery. What could make us wrong. If purchase commitments to chip and memory suppliers that Arista describes as non-cancellable prove excessive, inventory write-downs and margin pressure would fall on shareholders. If the two largest customers move to alternative networks, our base case is too high. We could not reconcile the exact timing of when the large deferred revenue balance will convert to recognized revenue from the filings, so we did not add it to the growth path beyond what is already reported.