Arista Comes For Cisco’s Routing Franchise and Bulls Love It

The Street today is contemplating the announcement yesterday by networking equipment firm Arista Networks (ANET) of a new line of switch-routers, the “7500R,” which it claims is adept at transporting bits at 100 billions bits per second and handling large routing tables, and which it is pushing as a product for both cloud computing facilities as well as enterprise data centers.

The announcement coincided with Arista’s analyst day event, and according to one chap who was there, “financials were barely discussed.”

The product uses new chips from Broadcom (AVGO) called “Jericho.”

The move opens a new front in Arista’s battle with Cisco Systems (CSCO), that of routing. Arista has so far contented itself to operate merely in the domain of switches, while Cisco has classically dominated both routing and switching.

Cisco stock is up 51 cents, or 1.5%, at $28.61, while Arista is down 12 cents at $61.77.

Stifel Nicolaus’s Sanjiv Wadhwani, who rates Arista stock a Buy, with a $95 price target, calls this Arista’s entry to the routing market, writing that “the 7500R offers increases in capacity and performance by orders of magnitudes in comparison to the company’s previous highest-capacity spine.”

As a result, “the 7500R supports full internet routing with significant headroom for additional growth in IPv4 and IPv6 routes – broadening the company’s use case.” He thinks that’s a $2 billion new market for the company.

Wadhwani sees a number of applications, including “WAN,” or wide-area routing, “edge,” routing (though “longer-term”), use by content delivery networks (CDN), and also use by the company’s existing cloud computing customers, such as Microsoft (MSFT). The last of these, cloud, is the most immmediate opportunity:

With datacenter core routing (the most immediate opportunity for the company’s new 7500R), Arista looks to collapse the tiers that sit above the spine layer in datacenters today into a single tier via the 7500R. Current datacenter architectures typically use a routing layer to connect the switching fabric (where Arista sits today) with datacenter interconnect (DCI) optical boxes, and/or the Internet. These routers have been purpose built to support internet scale routing and advanced routing protocols – which has led to them being typically expensive proprietary devices that are somewhat inflexible in adapting to changes in application traffic demands and patterns.

Merchant silicon, particularly Broadcom’s Jericho, now has the capacity to support Internet routing – offering internet routing at a much more attractive density and cost. By supporting routing, with Ethernet interfaces and Coherent DWDM optics, we see Arista’s 7500R as a compelling solution for collapsing the DCI and routing layers into what Arista terms the Universal Spine Tier, offering a cost efficient, highly scalable and programmable solution for connecting datacenters to other datacenters and to the Internet.

Gabelli & Co.’s Hendi Susanto reiterates a Buy on Arista, writing that “We are incrementally more positive on Arista Networks” as “the new 7500R Universal Spine has strong routing platform offerings including attractive pricing and best-in-class industry performance, opening a multi-billion dollar market opportunity for the company. We continue to recommend purchase.”

This is going head to head with Cisco, writes Susanto, after attending the announcement at Arista’s headquarters:

7500R Series Universal Spine redefines networking and represents the first inflection point for cloud-scale routing. It provides additional market opportunity of router platform on top of its core switching solutions. It can replace legacy routing solutions and we believe it will compete against legacy router vendors, including Cisco.

Credit Suisse’s Kulbinder Garcha reiterates an Outperform rating, and a $90 price target on Arista, writing that this can replace Cisco’s “Core” routing equipment:

This could be disruptive for several reasons. First, the 7500R is Arista’s first switch & router combination, leveraging the full internet routing table and universal spine, and it is offered as a 100+ Terabit capacity platform in 1/10/25/50/100GbE port options. This means that the traditional core routing layer can now be replaced with an Arista 7500R. Second, fast growing cloud companies are demanding a product like this. For e.g. Netflix, which has already been using a test version, applauds the introduction noting that it is offering breakthrough price/performance at 10x more bandwidth at 1/10th the price of a traditional router. We see this as a first of many wins for Arista.

Nomura U.S. Equity Research’s Jeffrey Kvaal, who has a Buy rating on Arista shares, and a $95 price target, writing that the extent of routing features are a surprise:

While Arista had signaled modest routing features would enter its switch lineup, Arista appears to be aiming higher than thought. The company expects the 7500R to collapse the data center routing layer into the existing spine switching layer, and thus reduce customer spend. Sizeable routing tables should allow Arista to target some of the $9bn service provider edge router market as well.

Note that this will take some time:

While Arista is supporting live routing traffic at present at Netflix, the 7500R will only be broadly available in 2Q and customer certification of the routing features will likely require 6- 12 months. Arista noted collapsing routing and switching into a ‘universal spine’ would be a 3-5 year journey. We expect webscale customers to adopt the 7500R for its 100G switching capabilities rather quickly.

Kvaal sees no immediate hit to Cisco and Juniper Networks (JNPR):

Lengthy certifications aside, existing routing vendors have invested years if not decades in custom code for each telco. Arista would struggle to match that, and so will likely only target telcos who, like AT&T, are shifting architectures. Rivals will have time to gauge customer sentiment and react if needed. Reaction times may be slowed, however, as switches and routing can lie across organizational boundaries and operating systems.

On a less-ebullient note, UBS‘s Steve Milunovich, who has a Neutral rating on Arista, and a $63 price target, writes that the product “embeds some routing features.

Milunovich doesn’t see the product handling the most demanding Internet routing tasks:

Given the routing stack requirements, we believe the 7500R is not addressing the internet-facing router market within data centers. Instead, the target appears to be routers that are used for data center interconnects. Arista did not provide a TAM estimate. In our opinion, the 7500R could capture a portion of the existing $2.2bn DCI market forecast by Dell’Oro. Given switches are priced lower than routers, the true incremental TAM for Arista could be less than $500m. The traditional SP routing market is not a near-term target but architectural changes could open doors over time. We note that Arista has a dedicated service provider sales team.