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Arista delivered both sales and profits that surpassed expectations and raised its 2026 outlook.

The company noted that supply constraints would persist for the next year or two, weighing on its growth.

The steep valuation, combined with near-term challenges, sent fair-weather investors to the sidelines.

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As we enter the next phase of artificial intelligence (AI), investors are increasingly looking to data centers as a proxy for AI adoption. Furthermore, companies that supply key components to data centers and the servers they power are being carefully scrutinized for insight into where AI goes from here.

One such company is Arista Networks (NYSE: ANET), which supplies cutting-edge Ethernet switches, routers, and other networking hardware that are crucial to data center operations. Its position has fueled strong gains, with the stock rising 87% over the past year and 34% over the past month alone.

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Investors were watching closely when the company delivered its quarterly financial report, and while there was plenty to like, the stock plunged in the wake of its robust results. Here's why.

Robust results on strong demand

For the first quarter, Arista generated revenue of $2.7 billion, up 35% year over year and 9% quarter over quarter. This drove adjusted earnings per share (EPS) of $0.87, up 32%.

For context, analysts' consensus estimates were calling for revenue of $2.62 billion and adjusted EPS of $0.81, so the results sailed past Wall Street's expectations.

Chair and CEO Jayshree Ullal hailed the quarter, saying "Arista is off to a strong start in Q1 2026, with both our results and our industry-leading net promoter score," she said. "We are uniquely positioned to deliver the mission-critical confluence of secure client-to-campus-to-cloud and AI networking."

For context, the Net Promoter Score (NPS) measures customer loyalty and satisfaction by asking, "How likely are you to recommend the company to a friend or colleague?" A score above 50 is excellent, and above 80 is considered world-class -- so Arista's NPS of 89, which translates to a customer approval rating of 94%.

Plenty more where that came from

Arista highlighted a number of growth drivers that will fuel its progress over the coming months and years.

One of the challenges facing modern data centers is that existing industry-standard optics are limited in the bandwidth they can handle, pushing data centers to their limits. Earlier this year, Arista -- along with a consortium of industry partners -- unveiled eXtra-dense Pluggable Optics (XPO), high-density, liquid-cooled optics specifically designed to meet the needs of AI data centers. These next-generation optics deliver 8 times the bandwidth of their predecessor while preserving the convenience of plug-and-play.

Arista revealed that XPO reduces the number of networking racks necessary by 75% and saves up to 44% of floor space compared to the previous generation of pluggable optics.

The company also developed the 7800 AI spine, which is capable of connecting thousands of GPUs, while reducing latency -- the lag that comes from transferring data -- and minimizing power consumption. Energy savings have become a hot-button issue for data centers, and Arista is at the forefront of power-miserly solutions.

Ullal also noted that "Our demand is actually the best I have ever seen in my Arista tenure," but added that capacity is "constrained for the next couple of years," due to long lead times and supply limitations.

These solutions and the resulting strong demand prompted Arista to issue a Q2 forecast calling for revenue of $2.8 billion and adjusted EPS of $0.88. This was slightly ahead of Wall Street's consensus estimates of $2.78 billion and EPS of $0.86. The company also increased its full-year revenue forecast to $11.5 billion, or growth of roughly 28%. Management also increased its AI-centric revenue target to $3.5 billion for the year, doubling its AI sales.

When good simply isn't good enough

So why is the stock down? In a word: Valuation. Arista stock has gained 87% over the past year (as of market close on Tuesday), with a commensurate increase in its valuation. The stock is currently selling for 62 times earnings and 39 times next year's expected earnings, a lofty multiple to be sure. Add to that the company's capacity constraints, and fair-weather investors are engaging in a bout of profit-taking. As of 8:20 p.m. ET, the stock was down roughly 10% in after-hours trading.

Does that mean Arista Networks is a sell? Not at all. It simply means the company will need to grow faster to justify its higher premium. I have no doubt that Arista is up to the task and that growth will likely come sooner than later.

I'm an Arista investor, and I plan to hang on to every share.

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Danny Vena, CPA has positions in Arista Networks. The Motley Fool has positions in and recommends Arista Networks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.