While artificial intelligence (AI) has been the driving force behind the current bull market, AI stocks have diverged this year. Not every AI-related company is seeing its stock climb in 2026. A combination of high market expectations and a consideration of longer-term impacts of AI has weighed on many companies' share prices.
One AI stock saw its price tumble after the company reported first-quarter earnings, and not because its financial results were disappointing. Rather, management's relatively rosy outlook wasn't rosy enough for investors. Arista Networks (ANET +3.57%) saw its stock price tumble by a double-digit percentage after its report. But that could be an incredible buying opportunity for long-term investors.
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Short-term problems
The biggest challenge facing Arista Networks right now is its supply chain. It's unable to secure the chips and other components it needs for its high-end networking equipment used in AI data centers.
That's put pressure on its gross margin, which management expects to persist for the time being. It also means that supply can't keep up with demand. But because Arista's customer base is highly concentrated, it can't exercise significant pricing power to boost revenue.
All this is weighing on the stock, as investors were disappointed with management's full-year outlook following its first-quarter report. Management is typically very conservative at the start of the year, raising its guidance throughout the year. In its first-quarter earnings release, management raised its full-year revenue guidance by a mere $250 million, tied to AI-related revenue. It now expects sales of $11.5 billion in 2026, up 28% year over year, with $3.5 billion coming from artificial intelligence products.
But Arista maintains its prominent position as the best-in-class solution for high-speed networking. Its advantage stems from its willingness to use the best components from other companies and package them with its software platform, Extensible Operating System, which provides customers with a unified interface for leading-edge hardware. There's a huge, growing demand for that solution, and while it shows up somewhat in Arista's top line, it's made itself even more evident in its backlog.
Today's Change
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Current Price
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153.90
Arista ended the first quarter with $6.2 billion in deferred revenue, up 15% year over year, and $8.9 billion in purchase commitments, up 44% year over year. That suggests Arista will continue to gain market share as more networking equipment moves toward AI-focused data centers with extremely high-speed requirements.
Even after the sell-off in the stock, shares trade at a premium. But with its growing backlog, investors should expect revenue growth to reaccelerate in the near term and gross margin to reexpand over the long term, ultimately leading to operating leverage and very strong earnings-per-share growth. That's why even at 39 times earnings expectations, the stock looks like a good buy.