Madison Trims Arista After AI Rally Lifts Its Valuation

A stock can be a portfolio winner and still become a sell. Madison Investments says it reduced its Arista Networks position in the second quarter, judging that the networking company’s strong outlook was already reflected in its share price.

The decision came even as Arista ranked among the Madison Mid Cap Fund’s five biggest contributors for the quarter. Madison credited the AI data-center buildout with lifting demand for the company’s networking equipment and driving revenue and backlog growth. Its explanation was about price, not a retreat from Arista’s business prospects: the fund described the company as a leader in high-speed data-center switches, but concluded that the stock had run ahead of its bright outlook. The letter did not say how many shares Madison sold or whether it exited the position.

Arista’s latest results help explain both sides of that judgment. Revenue reached $3.036 billion in the second quarter, up 37.7% from a year earlier, while non-GAAP diluted earnings per share rose to $1.02 from 73 cents. The company also forecast about $3.3 billion in third-quarter revenue. Those figures show why investors have bid up shares, but rapid growth alone does not settle whether a stock’s price leaves room for further gains.

The valuation call also lands in a quarter when the fund trailed its benchmark. Madison Mid Cap Class Y returned 8.58%, compared with 13.83% for the Russell Midcap Index, according to the investor letter. Against that backdrop, trimming a strong performer can lock in gains and limit exposure to a stock whose price has climbed faster than a manager’s estimate of its underlying worth. It also means accepting the risk that the rally continues without the full position.

Arista’s growth case depends partly on continued spending to connect AI servers and data centers. CEO Jayshree Ullal said customers increasingly view networking as central to AI infrastructure; the company has introduced new 1.6-terabit platforms aimed at those workloads. For Madison, the question was not whether that opportunity exists, but how much of it investors had already priced in.

That distinction matters for shareholders: a fund’s sale is not a verdict that Arista’s growth has peaked. It is a reminder that even a leading supplier in a booming market can become less attractive when expectations rise alongside the business.