#Arista is better set up than competitors for an era of #cloudcomputing networking, argues Josep Bori of Berenberg, given its focus from the start on software. However, he does advise investors to keep an eye on the move to "in-sourced" software by Arista's own customers, such as #Microsoft, as a potential long-term risk. ByTiernan Ray Updated Sept. 26, 2017 2:32 p.m. ET  Facebook's Altoona data center, curtesy of Berenberg. Berenberg technology analyst Josep Bori today initiates on two cloud computing leaders, Arista Networks (ANET), and Equinix (EQIX), assigning both stocks a Buy rating and arguing that their respective leadership in their areas of specialty is becoming increasingly evidently. For Arista, to which he assigns a $225 price target, Bori assigns the honor of being "an emerging leader in cloud/datacentre networking,” and notes that what sets the company apart is its software, the “EOS” operating system. He notes the company’s founders figured out the edge of software back in 2004:  The company founders recognised back in 2004 that the next generation of cloud and enterprise datacentre networks would have significantly higher requirement in terms of performance, resilience, programmability, automation and pricing […] They also committed to building a hardware agnostic platform, avoiding the use of application specific integrated circuits (ASICs), which add materially to a traditional switch’s bill of materials. Its Hardware Abstraction Layer (HAL) allows EOS to run on a wide family of merchant silicon (eg Broadcom, Cavium and Fulcrum/Intel) and even on hypervisors and containers (ie virtualised hardware infrastructure). He likes the suitability of the product for the cloud. Bori features the diagram of a Facebook (FB) data center, at the top of this post, as an example of how Arista is better suited to cloud computing networking models. That gives Arista a nice growth market: We believe Arista Networks above-market growth is set to continue due to its large exposure to the high-growth segments of the IT market, where it is gaining market share, largely due to the reasons described in the prior section. Indeed, the company’s revenues grew 43% and 35% in 2015 and 2016 respectively, while the overall datacentre Ethernet switch market grew 5% and 13%, respectively. The software lets the company be better prepared for a scenario in which networking gradually moves from integrated boxes to being just a software sale, he thinks: We believe the company is better prepared than most of its peers for a potential business model transition from hardware appliances to software subscriptions, an ongoing industry trend, largely due to its 1) single image operating system across all its products, 2) which is hardware-independent by design, and 3) an already “unbundled” offering via its vEOS and cEOS for virtual machines and containers respectively. That said, Bori notes that there is a risk to #Arista from both software-only networking vendors, including "several pure software vendors in the market, such as #CumulusNetworks, #BigSwitch and #Pica8,” and also from its large cloud customers “in-sourcing” their own networking software. Bori goes through a lengthy discussion in particular of #Microsoft (MSFT), Arista’s biggest customer. Microsoft is developing something called “ #SONiC ,” its own networking software. Bori concludes that the threat of in-sourcing can’t be totally dismissed: In conclusion, while 1) it is encouraging that Microsoft’s use of Arista’s technology has continued to increase even after publicly announcing SONiC last year, 2) Arista Networks features prominently in its architectural slides, and 3) the level of internal IT and networking know-how required to develop a disaggregated switch on SONiC is likely only available to the very largest webscale vendors, it is also true that Microsoft knows a thing or two about developing operating systems and is currently working in its own Azure networking layer, which could potentially lead to a change in Arista’s relationship with its largest customer over the long term. Arista stock today is up $2.64, or 1.5%, at $183.47.
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