Tess Torelli April 14, 2018

Arista shares fell more than 9 percent on Friday after an industry research firm issued a report suggesting that big customers like Microsoft could be moving some business to lesser-known companies.

Cleveland Research’s Ben Bolin downgraded Arista to “neutral” from “buy” and said there’s been “some shift” from Arista to so-called white-box switches at companies operating large data centers. One such customer is Microsoft.

The market selloff reflects the risk smaller companies face when selling technology to the biggest providers of cloud services. Arista, which went public in 2014, counted on Microsoft for 16 percent of its revenue last year, CEO Jayshree Ullal said in February, and she expects Microsoft will still account for 10 percent of revenue in 2018.

Eschewing big switch makers in favor of custom designs is not a new trend, but Microsoft has not historically been a part of that movement. In a December note, analysts at Stifel estimated that 90 percent of the white-box market comes from Microsoft’s top two competitors in public cloud, Amazon and Google.

The data centers powering Microsoft’s Azure public cloud and Office 365 services are becoming a more important part of the business, especially following a recent reorganization. Azure revenue increased98 percent last quarter. In a note last month, Nomura Instinet analysts wrote that Microsoft’s roughly 20 percent growth in capital expenditures, and a “near doubling” at Facebook, should help Arista this year.

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