Not Nvidia. Not AMD. This Networking Stock Is Gaining From Every AI Data Center Built.

Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) have been some of the top-performing artificial intelligence (AI) stocks due to their chips, but the next winner may be in networking. Data centers require a significant amount of networking cables, and that can position Arista Networks (NYSE: ANET) to outperform both chipmakers during the next year. Here's what makes the stock worth watching.

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The business model

Arista Networks specializes in Ethernet switches, which transport data in, out, and between server racks. Those racks contain the AI chips that process intense workloads and enable AI products and services like ChatGPT. All of Arista's switches run on its proprietary software.

The neat thing about the software is that it lets Arista's Ethernet switches easily talk to each other and move data more seamlessly across racks and the data center as a whole. Engineers can make changes to thousands of Arista switches simultaneously instead of making changes to individual switches, which was a nightmare in the early 2000s.

Arista sells more switches when customers need to upgrade their data centers to handle more intense workloads. Old ones need to be replaced. Sales also go up when tech giants need to expand their data centers. More chips require more racks, and more racks translate into additional Ethernet switch sales.

It's a huge pain for any data center to switch from Arista to any competitor. That would mean getting rid of all Arista switches and the critical software that links them all together.

Arista's customers have deep pockets

Arista leans heavily on a small number of customers, with Microsoft (NASDAQ: MSFT) accounting for more than one-quarter of the company's 2025 revenue. Although that type of concentration concerns some investors, Arista's high retention rate and good relationship with hyperscalers are important to keep in mind.

With that issue addressed, it's good to look closer at the customer profile. Microsoft is one of the cloud providers that works with Arista Networks. Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META) are also customers, and all four of these companies pull in billions of dollars in quarterly profit.

Furthermore, all of these customers have committed to spending more money on artificial intelligence. As their efforts scale, they will need to bolster their AI infrastructure, and that includes buying more of Arista's products.

Those hyperscalers also posted double-digit percentage year-over-year revenue growth rates in their most recent quarters. If growth remains strong, these companies will have no problem pouring more money into Arista's coffers. The broader expansion of AI data centers can also result in new customers that improve diversification.

Revenue growth is trending higher

The AI tailwind has benefited many companies, including Arista, and it's visible in financial results. Arista delivered 38% year-over-year revenue growth in the second quarter. It has an annualized revenue growth rate of 27% during the past decade, so the current growth rate is a big deal.

Arista's $3 billion in revenue also marked a 12% sequential boost. Arista Chief Executive Officer Jayshree Ullal touted the results while explaining that customers see Arista as the "central nervous system" for AI infrastructure.

It's not just this quarter, either. Arista has $5.1 billion in short-term deferred revenue, which will become realized revenue by the end of the year. It also has $1.8 billion in long-term deferred revenue.

Its revenue growth is also coming from all key regions. North American revenue increased by 36% year over year, with strong gains also posted in the EMEA and APAC regions. U.S. hyperscalers are driving most of the AI expenditures, but more traction in other parts of the world can help Arista sustain elevated revenue growth rates even if the North American market slows.

However, that slowdown scenario is unlikely anytime soon. Grand View Research projects a 31% compound annual growth rate (CAGR) for the AI industry through 2033, and Arista should be able to ride that momentum to new all-time highs.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Arista Networks, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.