Why Arista Networks Stock Soared Today

Arista Networks (NYSE: ANET) stock surged in Wednesday's trading. The networking hardware company's share price ended the daily session up 6.8% and had been up as much as 8% earlier in trading. Meanwhile, the S&P 500 index closed out the day up 0.6%, and the Nasdaq Composite index ended the session up 1.2%.

At the White House yesterday, leaders from OpenAI, Oracle, and Softbank announced they had formed a new joint company that will invest up to $500 billion in U.S. artificial intelligence (AI) infrastructure. As a provider of hardware including switches and routers, Arista could wind up landing sales through the new investment project.

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Arista Networks stock pops on big AI infrastructure news

OpenAI, Oracle, and Softbank have come together to form Stargate -- a joint venture aimed at strengthening domestic AI infrastructure. At Stargate's announcement event yesterday, Oracle CEO Larry Ellison said that the company's first data center is already being constructed in Texas and will span one-million square feet upon completion.

The three partners are pouring a $100 billion initial investment into Stargate and could ramp their investment up to $500 billion in subsequent years. The move is a bullish development for AI processing and networking companies, and Arista Networks was among the names to get a valuation boost today thanks to the news.

What comes next for Arista Networks?

Arista Networks looks poised to see long-term tailwinds related to AI data center spending. On the other hand, some strong future growth is already priced into the stock. With the company valued at roughly $163.5 billion, Arista is trading at 52.6 times this year's expected earnings.

With its third-quarter (Q3) report, Arista's network increased 20% year over year to hit $1.81 billion. Meanwhile, non-GAAP (adjusted) earnings per share (EPS) for the period increased roughly 31% year over year. The company is serving up some encouraging growth and could have a runway for significant valuation expansion over the long term, but its current valuation profile could also set the stage for volatility if future earnings reports deliver growth that comes in lower than Wall Streets targets.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arista Networks and Oracle. The Motley Fool has a disclosure policy.