The stock market has been a stellar performer this year, with the FTSE 100 delivering a total return of 16.3% and the S&P 500 generating 33% over the last 12 months. However, with uncertainty surrounding the new UK government Budget and a newly-elected US government, bearish investors are calling for a new stock market crash.
Despite the arguments being made, the stock market’s largely proven to be resilient to the shifting political landscape. In the short term, volatility has increased surrounding big political events. But as the market digests and adjusts, these ‘mini-crashes’ often reverse in a matter of weeks.
Therefore personally, I remain bullish. However, there’s no denying that another stock market crash will eventually happen. So let’s assume the worst-case scenario and say stock prices are about to plummet. Which stock am I getting ready to buy to capitalise on the lower prices?
Double-down on winners
When deciding where to invest capital during a market downturn, the first place I start looking is my own portfolio. And one stock I’d love to buy more of at a better price right now is Arista Networks (NYSE:ANET).
Arista’s not a name commonly known in most households. But its ethernet switches power data centres across the planet, creating the bandwidth needed for reliable, low-latency network performance.
Over the last decade, management’s evolved the business to become a critical part of global IT infrastructure, disrupting previous industry leaders such as Cisco Systems. And with AI driving up demand for ultra-fast network technologies, it’s no surprise that the firm has just launched its Etherlink artificial intelligence (AI) platform to capitalise on this tailwind.
Subsequently, its latest results significantly outpaced expectations, beating both revenue and earnings forecasts. Delivering better-than-expected results seems to be a recurring theme for this enterprise. So it’s hardly a surprise that shares have skyrocketed by more than 700% over the last five years.
Every investment carries risk
Despite systematically stealing market share from Cisco over the last decade, Arista still battles against intensely fierce competition. Beyond Cisco, management has Nvidia to fend off, as well as Microsoft, which is reportedly developing its own proprietary networking hardware for AI. The latter’s particularly troubling, as 39% of Arista’s revenue in 2023 came from Microsoft and Meta Platforms.
Then there’s the question of valuation, as Arista isn’t cheap. The stock’s price-to-sales ratio currently sits at just shy of 20. And its forward price-to-earnings ratio is closer to 42! In other words, the firm’s explosive long-term growth potential seems to have already been baked into the share price, making it an expensive investment right now, especially considering the revenue concentration risk.
However, should a stock market crash come along and Arista shares take a tumble, then snapping up more shares of this terrific business seems like a no-brainer for my portfolio.
