In 2024, the stock market has experienced significant growth. Up until the conclusion of July, S&P 500 i The index experienced a significant increase of over 15%, which was attributed in part to the enthusiasm surrounding artificial intelligence (AI).
The certainty of the positive economic conditions lasting until the end of the year is diminishing. Leading artificial intelligence stocks have experienced significant losses, while worries about a possible recession have been exacerbated by a disappointing U.S. employment report. There are indications that market volatility could be increasing, as evidenced by a sharp decline in major U.S. stock indexes on the previous Monday, marking the biggest single-day decrease in approximately two years.
Forecasting the market’s future behavior is uncertain, however, investors with a long-term perspective should be prepared to take advantage of discounted opportunities in case of widespread fear. Here’s my reasoning. Arista Networks is a company that specializes in providing networking solutions. ( ANET 0.01% ) and Cloudflare ( NET 0.18% ) on my market sell-off watchlist.
Connecting in the age of artificial intelligence
Data centers created for the purpose of training and executing tasks. sophisticated artificial intelligence models AI workloads have distinct specifications compared to general cloud tasks. They typically require a large number of specialized accelerators like GPUs. Nvidia In order to fully utilize the hardware in an AI data center, it is important for all components to be interconnected and for communication to be rapid. Congestion in the network can significantly reduce performance in such environments.
Arista Networks is significantly smaller in size compared to the networking industry leader. Cisco Systems However, Arista is currently excelling in the high-end networking hardware sector. Arista has outperformed Cisco in the market for 10GbE and above data-center switches in terms of the number of ports, and is close to surpassing Cisco in terms of revenue as well.
Over the last year, Arista has made $6.3 billion in sales, with an adjusted operating margin exceeding 40%. The company serves approximately 10,000 clients, but a notable risk is the concentration of customers. Microsoft and Meta Platforms Together, they accounted for 39% of Arista’s sales in 2023.
Although the high level of customer dependency is a worrisome factor, the company’s adaptable, expandable, and technology-focused structure is attracting businesses that are constructing large AI data centers. Arista’s stock is pricey, trading at nearly 40 times projected earnings. I would not consider purchasing it at its current value, but in the event that Arista’s shares decline due to panic and concern, the stock may present a promising investment opportunity for the long run.
A potential cloud giant
Cloudflare provides a wide range of cloud-based solutions beyond just website security and performance enhancement. Their offerings include Zero Trust for user verification and a comprehensive developer platform. Users can deploy a complete cloud application, including a serverless database, on Cloudflare’s network without the need to handle servers and other infrastructure.
Cloudflare remains a relatively small company compared to the major players in the cloud industry. Its revenue increased by 30% year over year to $401 million in the second quarter, but the company has not yet achieved profitability based on generally accepted accounting principles. GAAP)d Cloudflare’s strong reputation in providing fundamental security and caching services for websites and servers positions it well to attract free users and eventually convert them into paying customers. This also presents a significant opportunity for the company to offer more services to its expanding customer base.
The company boasts over 210,000 customers who pay for its services, in addition to many free users. Approximately half of its income is generated from international sources, with over 3,000 major clients contributing at least $100,000 each year. In contrast to Arista, Cloudflare does not face issues with having a high concentration of customers.
The price of Cloudflare stock is higher than that of Arista stock, with a trading value of more than 100 times forward-adjusted earnings. While Cloudflare has good growth prospects, I find the current price to be too high.
I would consider adding Cloudflare’s stock to my portfolio if a decrease in the stock market brings down its valuation to a reasonable level. However, the price needs to be attractive for me to make the investment.
