Better Tech Stock: Arista Networks vs. Cisco Systems

Globe and Mail

5 hours ago

Arista Networks (NYSE: ANET) and Cisco Systems (NASDAQ: CSCO) represent two different ways to invest in the networking infrastructure and software market. Arista is a smaller, higher-growth player focused on data centers and cloud-scale networks, while Cisco is the more diversified market leader serving a wider range of sectors.
Over the past five years, Arista's stock rallied nearly 540% as Cisco's stock advanced about 50%. The S&P 500 rose more than 90% during that period. Let's see why Arista consistently outperformed its larger rival and the broader market, and if it's still the better buy.
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What are the key differences between Arista and Cisco?
Cisco is the largest networking hardware company in the world, but it's known for locking its customers into its proprietary chips and software. It reinforces the stickiness of that ecosystem with its integrated security, cloud, and network observability services.
Arista takes the opposite approach and primarily uses Broadcom 's chips with its open source software and application programming interfaces (APIs). That flexibility makes it appealing to customers which don't want to get stuck in Cisco's walled garden.
Arista's use of a single modular operating system, EOS, often makes it a simpler alternative to Cisco's fragmented ecosystem of different operating systems (including IOS, NX-OS, IOS XE). Arista's low-latency switches are also optimized for hyperscale cloud networks, which makes it a top choice for tech giants like Meta and Microsoft, while its CloudVision platform allows its clients to easily monitor and analyze their deployments.
Arista might initially seem like an existential threat to Cisco, but Cisco remains the leader in end-to-end deployments which bundle together campus, branch, wide-area networking (WAN), and data center solutions. Cisco's integrated cybersecurity and collaboration features can also reduce the need for additional third-party services, while its proprietary chips are better optimized for its own hardware and software than third-party chips.
In other words, Cisco is a "one stop shop" for networking solutions, while Arista still mainly provides a narrower range of products and services for the cloud and data center markets.
Which company is growing faster?
From fiscal 2019 to fiscal 2024 (which ended last July), Cisco's revenue grew at a compound annual growth rate (CAGR) of less than 1% as its adjusted EPS rose at a CAGR of nearly 4%. During those five years, Cisco struggled with three major challenges.
First, the pandemic reduced enterprise and campus orders and disrupted supply chains. Second, its supply chain problems dragged on after the pandemic ended. Lastly, its customers ramped up their orders again as it resolved those production issues in fiscal 2023, but rising rates and other macro headwinds throttled the actual deployments. As a result, customers ended up with too many uninstalled products and Cisco's orders slowed.
As Cisco slogged through those challenges, it acquired Acacia Communications in 2021 to expand its portfolio of optical networking products. It also bought ThousandEyes in 2020 and Splunk in 2024 to expand its network observability services. Those acquisitions should diversify Cisco's business away from its core routers and switches.
From 2019 to 2024, Arista's revenue rose at a CAGR of 24% as its adjusted net income rose at a CAGR of 30%. But during those five years, a stock split and rising stock-based compensation expenses reduced its adjusted EPS at a negative CAGR of 1%.
Arista fared better than Cisco during the pandemic, because its core cloud and hyperscale customers continued growing through that crisis. Arista also experienced milder supply chain disruptions than Cisco, since Arista had a tighter portfolio and mainly relied on Broadcom for its chips, and it didn't suffer the same backlog issues as its supply chains normalized.
Arista also made a few acquisitions over the past five years, including Awake Security in 2020 (to challenge Cisco in the security market) and the edge networking company Pluribus in 2023. Those deals weren't nearly as big as Cisco's, but they're gradually expanding Arista's ecosystem.
Which stock is a better value right now?
From fiscal 2024 to fiscal 2027, analysts expect Cisco's revenue and EPS to grow at a CAGR of 5% and 9%, respectively. That growth should be driven by the expansion of its subscription and services, AI tailwinds for its networking infrastructure business, rising demand for its security and observability services, and the normalization of its hardware backlog. That's a solid growth trajectory for a stock which trades at 17 times forward adjusted earnings while paying a forward dividend yield of 2.5%.
From 2024 to 2027, analysts expect Arista's revenue and EPS to increase at a CAGR of 19% and 15%, respectively. Arista should benefit from the growth of the cloud and AI markets, its expansion into the enterprise and campus markets to challenge Cisco, and the expansion of its integrated security services. That's a rosy outlook, but Arista's stock is a bit pricier at 33 times its forward adjusted earnings -- and it's never paid a dividend.
Cisco and Arista are both promising long-term investments. But if I had to choose one, I'd stick with Arista because it's growing faster, it stock is still reasonably valued, and it's well-poised to disrupt Cisco over the long term.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun has positions in Meta Platforms. The Motley Fool has positions in and recommends Arista Networks, Cisco Systems, Meta Platforms, and Microsoft. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.