Arista Networks Inc

We initiated a new position in Arista Networks, a high-performance networking company focused on software-driven cloud architectures for hyperscalers, cloud providers, and other high-performance computing environments. The company's core innovation, the Extensible Operating System (EOS), is a single, highly modular Linux-based platform that runs across all switches, enabling scalability, automation, and reliability and operational simplicity across complex network environments. Arista’s focused architecture and superior product performance have supported stable gross margins of approximately 60-65% and non-GAAP operating margins above 40%, demonstrating meaningful pricing power.

Arista Networks Inc returned 38.4% during the quarter, ending with a weight of 5.1%. Arista is the leading provider of data center switches to cloud network customers. Arista reported strong first quarter results with record revenue and free cash flow ahead of expectations, but guidance fell short of high expectations due to increasing supply chain shortages. However, management subsequently clarified this dynamic, clearly delineating 54% growth inclusive of deferred product revenue. Management also expressed confidence in the outlook for 2026 along with a constructive demand backdrop for 2027.

We have initiated new positions in Arista Networks this quarter where we see exciting long-term growth potential and where we intend to build our positions over time. The key question for investors is whether today's SGA growth bonds continue to deliver the predictable fundamental compounding that defines the investment case. If one believes that to be the case and if one wants exposure to companies that have historically delivered a counter-cyclical relative performance pattern, then the current opportunity is incredibly compelling.

Arista Networks has benefited from sustained AI-related capital expenditure and continued demand for networking and compute infrastructure. The company is positioned well within the semiconductor ecosystem, which is experiencing robust growth due to the increasing importance of AI. This positions Arista Networks as a key player in the market, leveraging its capabilities to capture value from the ongoing AI infrastructure development.

Arista is the leading provider of networking equipment for hyperscale data centers. As AI traffic grows exponentially, data center owners increasingly need signal to move seamlessly not only within a given data center, but between data centers. The demands on the routers and switches that direct the flow of traffic are considerable. As the most sophisticated networking provider, Arista’s growth may accelerate in coming years.

We sold shares in Arista Networks (ANET) on valuation. Arista is the leader in high-speed network switches used in data centers. The surge in data center builds has boosted what was already a high growth profile, and share price performance has followed suit. We felt the bright outlook was now baked into the stock.

We hold positions in Lumentum and Coherent Corp., well-positioned for this multi-year expansion, and in Arista Networks, Inc., whose software moat and hardware leadership make it a core long-term holding. These stocks are down this year because the market sold the sector indiscriminately — yet all are bigger businesses, growing faster, with stronger competitive positioning than a year ago. We believe these are the types of companies that emerge intact on the other side of the AI transition — and at current valuations, the risk/reward is increasingly attractive.

Arista Networks, Inc. is mentioned as part of the portfolio's top holdings, but there is no specific argument or directional language provided regarding its future performance or valuation.

Arista Networks, Inc. is a leading high performance, Ethernet-focused, cloud networking provider. The company’s platform uses software to address the needs of large-scale cloud companies, cloud service providers, and large enterprises. Their EOS (Extensible Operating System) is a scalable, unified software stack that provides a coherent feature set for all segments of the networking industry. We believe Arista's strong position in the market, combined with the growing demand for cloud networking solutions, positions it well for future growth.

Arista Networks was among the main positive contributors to the fund's performance, benefiting from the ongoing enthusiasm around artificial intelligence (AI) and significant investments from hyperscalers. The technology sector, including Arista Networks, showed strong performance driven by robust corporate earnings and a surge in deals and partnerships across the infrastructure and cloud computing sectors. This positions Arista Networks favorably within the broader market dynamics, highlighting its potential for continued growth.