Last Friday, June 6, 2014, cloud-networking company, Arista Networks (ANET), made its public debut on the New York Stock Exchange (NYSE). The company’s shares were initially priced at $43. Although Cisco (CSCO), IBM, and Microsoft (MSFT) have dominated the networking market for the past two decades, Arista may finally present a credible challenge to these tech behemoths. Investors showed optimism in Arista’s future, as shares hit $59.72 in the first week of its IPO and now sit at roughly $65.
Two tech billionaires, Andy Bechtolsheim and David Cheriton, founded Arista in 2004. Bechtolsheim co-founded Sun Microsystems, now part of Oracle (ORCL), while Cheriton is a Stanford computer science professor. Additionally, both men were early Google (GOOG) investors who supported Sergey Brin and Larry Paige. Thus, given their Silicon Valley success, these two have the experience and credentials necessary to oversee Arista.
Arista provides a legitimate challenge to IBM's dominance over the networking industry because of its focus on cloud computing. Cloud computing is the practice of using a network of remote servers, hosted on the Internet, to store, manage, and process data (instead of local servers or personal computers). Cloud computing offers a faster, cheaper, and more efficient method of storing and sharing information, compared to traditional memory practices. Already, companies like Facebook (FB), Yahoo (YHOO), and Comcast (CMCSA) are switching to cloud servers.
When the Internet was invented, two decades ago, networking was based on innovative technology that provided the backbone to the Internet revolution. Companies like Cisco made their names by providing switches, routers, and servers that allowed networks to function. Since then, the tech trend has shifted to software and social media development. Nowadays, computer science engineers want to work for Facebook and Google, instead of developing the next generation of Internet routers. As a result, the "real" tech industry has suffered from a lack of innovation.
Enter Arista, a fresh take on cloud computing and networking. Its 7500 series modular and switching platform is rumored to be faster and much more affordable than competitive alternatives. Additionally, Arista's main product, a line of modules that connect servers and storage devices, was originally created for high frequency stock trading. Therefore, Arista's products appear extremely fast and effective.
Arista has already proven its worth. It maintains an impressive technology portfolio and is also profitable. Furthermore, Arista has over 2000 B2B customers. This correlates to an annual revenue for 2013 of $361 million, and a profit of $42.5 million. The company plans to raise $225 million in additional funding from its IPO. The fact that Arista has positive cash flows, and large capital reserves, makes it very attractive to prospective investors.
Moreover, industry analysts are questioning whether established tech giants have become complacent during their past decades of dominance over the networking market. Although Arista is still relatively small in comparison to its competitors, like Cisco, it controls nearly 6% of the networking market (compared to Cisco's 50% market share). However, cloud computing is a fast growing industry; if Arista continues to provide superior and more cost-effective products, it has the opportunity to be a Silicon Valley powerhouse in the next generation of networking companies.