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Why Shares of Arista Networks Are Surging Today

What happened

Shares of Arista Networks (NYSE: ANET) jumped on Friday following a strong third-quarter report. The networking hardware company beat analysts' estimates for both revenue and earnings by wide margins, with revenue growing by more than 50% year over year. This followed an even larger jump that came after the company's second-quarter report in August. The stock was up almost 10% at 1 p.m.

So what

Arista reported Q3 revenue of $437.6 million, up 50.8% year over year and about $19 million higher than the average analyst estimate. Product revenue rose 49.6% to $380.3 million, while service revenue jumped 59.2% to $57.3 million. "Our performance validates our meaningful traction with customers as they evolve from legacy to universal cloud networking designs," said President and CEO Jayshree Ullal.

Image source: Arista Networks.

Non-GAAP EPS came in at $1.63, up from $0.83 during the prior-year period and $0.43 higher than analysts were expecting. On a GAAP basis, Arista produced EPS of $1.68, up from $0.69 in Q3 2016.

Arista pointed to stronger-than-expected demand from major cloud computing customers as one driver behind its strong results. Unforeseen demand for 100-gigabit routing and switching deployments has pushed the growth rate among those customers to nearly 50%, up from typical levels of 20% to 30%.

Now what

Arista expects to produce revenues of between $450 million and $464 million during the fourth quarter, which would amount to a year-over-year growth rate of 39.3% at the midpoint of that range. Arista also expects a non-GAAP gross margin between 63% and 65%, along with a non-GAAP operating margin between 30% and 32%.

Shares of Arista have now more than doubled year to date. With revenue and profits surging, investors are having no problem paying up for the stock.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.