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Ricky Mulvey: They're the pipes that help data centers talk to each other and get information transferring. You get a little benefit of that when you're operating more large language models that require a lot more data transferring between each other.

David Meier: That's exactly right and it's especially even more important now with those large language models being trained.

Ricky Mulvey: Arista shareholders, if you're an investor in this company, if you're looking at this company, one of the things you're really banking on is Arista playing nice with its largest customers. That's Microsoft and Meta, which collectively make up more than a third of Arista's revenue. Those two customers. Now, I want to put on my evil consulting hat. I have gone into Microsoft and Meta, and I'm looking at this money we're sending to Arista and I say, why can't we just do this for ourselves? What does Arista do for these big tech giants that they don't want to do for themselves?

David Meier: What is Microsoft's core competency?

Ricky Mulvey: Building software.

David Meier: It's software. What is Meta's core competency?

Ricky Mulvey: Getting your attention.

David Meier: Correct. This is not in their area of expertise. This is a situation where they have decided to buy versus build. Now, that being said, a company like Meta actually works very closely with Arista Networks to make sure that the hardware that they buy is actually somewhat optimized for the jobs that Meta expects it to do. It's not that Meta or Microsoft couldn't do this on their own. It's more of, they don't want to do this on their own because Arista does it better, but they still work with Arista to make sure that the hardware and software perform as they need for their data centers.

Ricky Mulvey: These are companies with a lot of data moving between data centers, so they want to outsource the piping, if you will.

David Meier: Unbelievable amounts of data moving now. When I lived in Ashburn, Virginia, just to give you an idea, at peak loads, I believe, on the order of 30-35% of the world's data, the world's data moved through my backyard.

Ricky Mulvey: Wow, let's get into the business results for this quarter, now that we have that lovely setup. Revenue, it's up about 20% to seven billion dollars for the full year, and margins are also improving. This is wild, David. Arista achieved about a 50% operating margin [laughs] for the full year. Also, we talked about this on the show yesterday with Jason Moser, a net promoter score of 87, which I learned moves from -100 to +100, so that's really high. [laughs] What stood out to you from the quarter?

David Meier: It's really simple for me. It's beat and raise. For the quarter, revenue came in higher than expected for the fourth quarter of 2024. Guidance came in ahead of analysts expectations for the first quarter of 2025. They actually increased their guidance for the full year of 2025. In December, they said they were going to do between 15 and 17% growth, and management came into their conference call and said, No, we think we're going to do 17%. They've essentially raised their full year guidance, and they're not expecting any drop offs in terms of margin. What you can deduce from the fact that they are growing as fast as they are and achieving the margins that they are for what they provide, as well as their net promoter score, they are making customers happy. I'm sure of that based on that data.

Ricky Mulvey: As you listening to this segment, set that information aside in your brain when we get to the next company we talk about. Arista has a software product. It's called Network Data Lake. This is a meaningful part of the business. It did a billion dollar for the year. Basically, David, I tried watching a demo on this product, and here's what it seemed to me is I am a podcaster. I'm not a tech person. Monitors all of your Cloud data for security and patterns into my untrained eye if you're a business. You have an AI system to monitor all of the data for network security and spot patterns. This sounds like we don't need to go to a restaurant for Palantir when we have a network data lake at home. What's going on with this software?

David Meier: That's almost correct. Palantir actually can work with, we'll call it any type of data, whereas the Arista NetDL, which is the acronym for its network data lake, that really focuses on what's called the state of the network. Basically, what signals are they gathering to say, is our network running efficiently? Is there any trouble brewing out there, meaning, a workload is going up, or, Oh my goodness, it looks like something's getting ready to fail? What's interesting is within their NetDL, they have what's called an autonomous virtual assistant. It's their AI assistant or agent, that continuously monitors all these workloads and workflows, and then proactively says to someone on the network operating side says, there could be a problem here, you may want to do something about it. Or it says, this customer has actually been asking for more of the network. Maybe we should give it more resources.

The way to think about it is what Arista is providing here is a very small niche of what Palantir can do. But it's again, very important to a customer like Microsoft or Meta. They want to make sure their network never goes down. Always stays efficient because efficiency equals cost, and going down would mean no revenue. That's the purpose of the network data like, and it's a very important piece of what Arista sells in its terms of its platform.

Ricky Mulvey: We talked about the positive sides of this business, but it seems Wall Street's a little unhappy, CEO Jayshree Ullal [laughs] is trying to get ahead of it in the earnings call, saying, "While I do appreciate the exuberant support from our analyst community on our momentum, I would encourage you to pay attention to our stated guidance. We live in a dynamic world of changes, most of which have resulted in positive outcomes for Arista." What's she trying to tell the analysts here? [laughs]

David Meier: This is a little interesting. If we go back to 2023, the original projection for the 2024 revenue growth was 10-12%. What did they deliver in 2024? Almost 20%. There can be expectations that you're sandbagging. Again, let's go back to December. Company says, we're going to do 15%-17% revenue growth and then ups that up to a solid 17%. There is definitely some managing of expectations here. Don't expect this to go to 34% type of a thing. It's just natural, and that's the way markets and analysts tend to work. Once you see things happen, a pattern develops that you outperform, the expectation is you're going to continue to outperform. But the CEO is definitely getting out ahead of that by saying, no, I'm serious, stick with what I'm saying, not with what you want to hear from me.

Ricky Mulvey: Stick with what I'm saying, but also I might be sandbagging because we live in a dynamic world that often has positive outcomes for our business.

David Meier: There's also the point that I might be wrong, and I could be wrong on the negative side this time. Revenue might not appear and that would be really bad if expectations are too high.

Ricky Mulvey: That could happen in a few ways. You think about a company like Arista, if companies spend less money on these LLMs, less data moving through the pipes, that could have a negative impact for Arista. This is one of those companies that I have looked at from afar for a few years now. Now you're just talking to Ricky, David. You're just talking to me. One of the stocks I own in my retirement portfolio is ASML, which builds the machines that builds the machines that builds the most highly advanced chips in the world. This is one of those companies that I own sock it away. Don't worry about the little earnings blips that we've been talking [laughs] about here for the past 10 ish minutes. I'm starting to think, does Arista belong in that same basket for me? I don't own the stock, but it is on my watch list.

David Meier: I think that Arista, again, what we've been seeing, which is incredible growth, high margins for the products and services that it sells and very happy customers. I don't think anything's going to come tumbling down. But if we look at what some data within the most recent conference call, one of the reasons I think the stock is actually down today, is over a concern that Meta moved from 21% of sales in 2023, so 21% of all of Arista's sales in 2023 to only 15% in 2024. That implies that they pulled back on their spending. One scenario might be like, if big customers, the Microsoft, the Metas, the other hyperscalers, pull back on their spending, maybe because they found an alternative or maybe because they're negotiating price concessions, could be for a variety of reasons. That's the negative surprise that would actually be very bad. But again, go back to who else is providing such great hardware, such great value to shareholders and keeping customers happy. It is Arista. There's no doubt about that. This seems more like maybe a blip in the road than a serious problem for me.

Ricky Mulvey: Let's move on to our next story. David, let's mansplain a female forward dating app. How about we do that? Bumble. [laughs]

David Meier: That sounds good.

Ricky Mulvey: It is where women make the first move reported as well. This is a falling knife that seems to be continuing to fall. This was a company that at its peak was worth more than eight billion dollars. Now it's well under a billion. When I look at these dating apps and the underperformance, in some ways, it mystifies me because I know people get tired of them. I know people are hesitant to pay. But also, these companies have created some of the most powerful dopamine delivery software applications in existence. I hesitate to think of ones that deliver more dopamine. Maybe your gambling apps. [laughs] But where did this relationship between long-term shareholders and Bumble go wrong?

David Meier: That is such a great question. I looked back at the revenue for the past five years and 2021 was the peak. Grew their top line almost 32%. But that's when revenue started slowing. What happened following 2021. We have the pandemic that hit. There's lots of the positive investor sentiment about, this is the way the world is moving. We can't go out, we can't do things. We can't see people. This is the mechanism for people to get together. But it's only progressed growth has decelerated from that point forward. When you have high expectations and growth slows down, investor sentiment sours. At the beginning of 2021, it's forward enterprise value to sales ratio.

This is the projection of where they think revenue is going to be during the next year was around 12-13. That's extremely high. That is a company that is essentially doing nothing wrong. But that's because investors expected lots of growth. Today, that same ratio is 1.7 and the reason is is because investors are not expecting hardly any growth. It is simply that for probably a multitude of reasons, they have not been able to stay on the growth path that they were on into the pandemic and coming out of the pandemic.

Ricky Mulvey: That multiple getting cut by about 8X. It's tough to keep up the engagement. A recent Forbes poll of dating app users showed that folks on the apps are spending about 50, we'll call it a little under an hour per day. Ten years ago, it was 100 minutes daily. We went from over an hour and a half to under an hour. Logically, it's hard to really grow, I think, from 100 minutes per day on these dating apps. Then you're really getting into the three, four hour range. [laughs] You're watching Lord of the Rings movies for the same amount of time you're spending on these dating apps, David. [laughs]

David Meier: One thing we should note here, because even though I agree directionally, you would want more engagement on an app, if we think about it, I'm sure, even though I have never used this app being married, I'm sure that the actual experience got more efficient, meaning the developers of these apps could take the data that they were gathering from them via all that engagement and just making the process more efficient. Naturally, I would actually expect, the time on the app to go down because hopefully you were getting better at getting to your end state, which was going on a date or finding someone that you wanted to have a relationship. I'm not necessarily as concerned with the number of minutes going down, but what I am concerned about is the declines in the revenue per paying user. That's a proxy for people who are not getting the value out of the app that they thought they were going to get.

Ricky Mulvey: This is a company where basically both of their apps, they've grown the number of paying users they have year over year. However, the average amount that those users are willing to pay has dropped since then. Basically, you're swimming a little bit upstream there if you're looking at this company. You also got a founder story, Whitney Wolfe Heard. She is returning to the executive chair. What does she need to do on this tour to turn investor sentiment around?

David Meier: That's a great question. Let's go right to the source. This is what she said she's getting ready to do in the conference call. To quote, "As we execute this transition, basically her coming back as CEO, my focus is on the following key areas, the deep love and understanding of our product that only a founder can bring, reinspiring the unique magic of the bumble brand and operating with purpose, efficiency, and excellence across the entire company with a particular focus on technology." Frankly, that seems like quite a bit of high level jargon, more than a serious plan.

But I will also say, at this point, it's very early in the transition so I can understand, hey, the message being, look, this is my baby. I know all about it. I love it. I'm going to bring that magic and have it permeate throughout the organization. Not only that, but things have gone wrong with the bumble brand, and I'm going to turn that around. By the way, she praised the previous CEO for these things, which is operating efficiency, cost control, things like that. Basically says, we're going to keep doing however, the proof is going to be in the pudding. We'll see what she says and then compare it to the actual outputs over time.

Ricky Mulvey: Let's leave it there. David Meier, thanks for being here. Appreciate your time and your insight.

David Meier: Thank you so much, Ricky.

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Ricky Mulvey: You just heard about a stock where investors got really excited about a trend, but then got ahead of their skis in terms of expectations. Up next, Motley Fool senior analyst Anthony Schiavone joins me to talk about a read that is trying to come back from a similar phenomenon. Anthony, there was a great migration to the Sunbelt a few years ago. But maybe some institutional investors and retail investors overcalculated. This is a trend we've been talking about for a long time on Motley Fool Money, and it went like this. Offices closed during the pandemic. A lot of remote workers wanted to go somewhere sunnier, more outdoorsy. Why not go to a place like Nashville or even where I'm at Denver, Colorado.

Real estate developers followed, but maybe they over delivered. For example, now looking at Redfin data, the average rent in Nashville has fallen almost 30% since January 2023. Denver fell about 4% in the same time. I would honestly just seeing rents on Redfin right now for me, I would expect it to fall even more. Let's get into the investing side of this, though. There's a company I know you follow that I've looked at before as well, Mid-America Apartments. It really likes this region. How is this story played out for MAA?

Anthony Schiavone: The major theme in the Sunbelt, where Mid-America owns most of its apartments has always been about supply. If you look at the past decade plus, apartment construction, the Sunbelt, it's always been higher than the rest of the country, but the demand has always been higher too, and that's usually led to good performance for Mid-America throughout the market cycle. Real estate, it's always been a cyclical industry, but if you look at the last five years, especially, the development cycle has been pretty intense. If you go back to 2020, we obviously had the pandemic, and that delayed a lot of construction of new apartment buildings. Then also at the same time, like you just mentioned Ricky, remote workers relocated to warmer markets, which accelerated the migration and demand into the sun belt. As you move into 2021, 2022, we had that limited new supply because of COVID, and then that coincided with growing tenant demand. You had that supply and demand imbalance of the rapid rent growth for landlords and ultimately incentivize new development.

With AHS rates at historical lows, Builders decided to build, and they decided to build a lot. Plus the construction that was delayed during COVID, while that was also being delivered. So that brings us to the supply place today where supply is currently outpacing demand in the Sunbelt. For Mid-America, that meant a very challenging 2024. Pricing for new moving tenants was down about 6%. Net operating income was down about 2%, and then earnings fell to a low single digit percentage. It's been a pretty difficult year for Mid-America, but I do think the supply and demand fundamentals start to shift back into their favor over the next few years, and I think we'll touch on that in a little bit.

Ricky Mulvey: If you're a renter like me, this is great news. I am cheering this. I'm ready for rents to come down a little bit, and to have more bargaining power is someone who's renting. Mid-America, one of their strategies is that they're looking for apartments, not in the hottest possible spot. They're usually looking about 5-10 miles outside of that. It's people that want to be in the area but look for a little bit more of an affordable place, but still nice. They still got washers and dryers in unit, dishwashers, that thing. You can go to the pool and meet new friends at a Mid-America complex. Mid-America made three acquisitions in 2024. Here's what I found interesting. These were in properties that were about two thirds full. The story they've been telling is that they're in super high demand areas, and they are buying these spots that are one third empty to flip the fraction. That seems pretty low, Anthony, for these high demand areas.

Anthony Schiavone: Well, yes, the occupancy rate is definitely low, but there's a good reason for it because over the last year or so, Mina Barrick's strategy has been to buy newly constructed multifamily properties that are still in the lease up phase. After a building is constructed, it usually takes anywhere 6-18 months to fully lease an apartment building to get up to, like, 90% or higher occupancy. That's why the current occupancy rates, what they're acquiring is so low. The reason why they're specifically targeting those properties in lease up is because one, they're brand new high quality assets and two, it's very hard for the developer to refinance that property now that interest rates are a lot higher.

These are properties that probably started construction 2-3 years ago when interest rates were zero, and rent growth was going strong. But now that that equation has changed, most of those developers just they aren't able to get that permanent financing they need to continue owning the property. Folks like Mid-America can come in with lower borrowing rates and purchase the properties at a pretty attractive return.

Ricky Mulvey: These developers are basically saying we can't get the cash flow that we assumed based on this rent growth and these low interest rates. We're going to cash out now and sell to Mid-America Apartments, which has a ton of cash on the books, and they can come in and just we can end the investment here. Outgoing CEO of Mid-America, Eric Bolton told investors that while there is a large amount of oversupply, that's going to level off, and demand is going to catch up in 2026, 2027. I think the remote work trend is starting to shift a little bit. We're seeing that certainly at a federal level. I think some companies are also walking back remote work a little bit more and more. I think that's a pretty key part of this thesis with more people moving into the Sunbelt. I don't know. What say you?

Anthony Schiavone: Well, on that earnings call, Eric Bolton said that the tide is starting to turn when it comes to supply and demand fundamentals. I know he's talking his book, but I think he's got a pretty strong argument because last year, Mid-America had a 50 year high of new apartment supply in its markets. The fact that NOI net operating income and earnings only fell slightly in 2024, despite that massive supply wave, I think that just demonstrates how strong tenant demand has been. Last year, Mid-America's occupancy rate was still almost 96%. Their resident turnover was an historic low. If you look at their lease pricing for both new and renewal leases, rents only declined by less than 1% on a blended basis.

The results have definitely moderated. There's no question about that, but the demand side of the equation is still really strong. Then looking forward on the earnings call, Eric Bolton also mentioned that new construction startrap by 50% in 2024, and that's largely due to interest rates, lower rents, and higher construction costs. As long as the economy stays in good shape, I think the supply and demand fundamentals in 2026 and beyond look pretty good for Mid-America. I think growth has the potential to reaccelerate them.

Ricky Mulvey: Bad news for renters as we look ahead. Maybe if you're listening and you're looking to rent a place, looking for an 18 month or 24 month option could be in your interest. There's another multifamily read I wanted to talk to you about, and that's Avalon Bay. This is one I know you've checked out more than me. This is a little bit more geographically diversified, a little bit more suburban than MAA. One of the things in their earnings presentation they showed that I thought was interesting was how much cheaper it is to rent versus own, especially in their established markets that you're looking at the East Coast. In the Sunbelt, still it's about 700 ish dollars per month, cheaper to rent an apartment than buy one. In the established markets, that's 2,200. Renting is 2,200 cheaper than buying per month in these established markets. That's a number salad. But what does this trend mean for Avalon Bay? What are you seeing here?

Anthony Schiavone: The affordability spread between renting and owning a home is something pretty much all public rats have called out on their earnings calls so far, almost regardless of geography. But since it's so much cheaper to rent than to own, the resident turnover rates are near historic lows for most public apartment rates. Fewer tenants are leaving apartments to purchase a home because interest rates are so high, and that's important because it usually leads to lower cost because you don't need to repair or remodel the unit if the tenant is still living in it. Additionally, you have fewer units that are sitting vacant and waiting to be released. For Avalon Bay, I think the affordability gap really helps on the expense side of things more than anything. I think just the combination of relative affordability and the fact that there's also not a ton of new supply in Avalon Bay's more coastal, more suburban markets relative to the Sunbelt, I think that's a big reason why they were able to grow earnings at a decent rate this year.

Ricky Mulvey: Then Avalon Bay is making a little bit of a different bet than MAA is. That's they're looking toward the suburbs more. What's the bet on the suburbs that Avalon Bay is making?

Anthony Schiavone: About 73% of Avalon Bay's portfolio is in suburban markets on the East and West Coast, and they actually plan to get that up to 80% every time. There's a few reasons why Avalon Bay targets the suburbs. The first is and this might be surprising, but there's typically less new supply in suburban markets than urban markets because the entitlement process in the suburbs tends to be a lot more difficult because those local jurisdictions don't really want new rental housing to grow in their markets. Secondly, a lot of Avalon based tenants are higher income tenants who are renting by choice, which also can lead to lower turnover costs, lower remodeling costs over the long term.

Ricky Mulvey: As we talk about these two reads, both of them pay a little more than a 3% dividend. That's about what you can get from the Schwab dividend ETF SCHD. For investors looking that are thinking about income that are looking at these reads, what expectations should they have?

Anthony Schiavone: I think of the shorter term, I think the returns that these companies could generate are a little bit higher just because of the fact that they're leaning in a lot. Well, we didn't really mention that they're leaning into development a lot right now, which I think is interesting ahead of that stronger 2026, 2028 period that they expect when rent growth is suppose to be higher. Avalon Bay, for example, in 2025, they expect to have $3.5 billion worth of construction which is 50% higher than where they ended 2024 ahead of that increased earnings growth period that they expect. I think in the shorter term, I think these companies can provide pretty good returns. But over the longer term, I wouldn't expect anything more than, say, 10, 12% per year. I think that's a reasonable expectation for real estate. But the key fact is that the risk associated with these investments, in my opinion, is a lot lower because people are always going to somewhere to live. I think that's the intriguing part about investing in a REIT is the lower volatility, the lower risk associated with it, better risk adjusted returns, I should say.

Ricky Mulvey: I think the housing shortage is going to go on for a long time. A lot of people that locked in those near 0% mortgage rates were probably going to want to hang onto those as long as they possibly can. I want to get back to the story we told at the beginning as we wrap things up. We talked about the building boom back in 2021, as investors got really excited about the Sunbelt. They were right on the trend. A lot of people moved out to Denver, a lot of people moved out to Nashville. But what happened is investors were right about the trend, but they over indexed. When we look at REITS, we think about the price to FFO, funds from operation. This is the REITS version of your price to earnings multiple, the price tag for the stock. What happened was is that price tag shot up for Mid-America apartments.

If you were excited about this trend, when it was heating up back in late 2021, you haven't totally lost, but the stock is down, and you've basically just collected a dividend of 3% for the past four or so years. I'm wondering if this story could foreshadow anything else in the real estate market. I'm seeing a similar trend for data centers right now, and you're seeing investors may be right about the trend, but what happens if they're over indexing, and then a few years from now, expectations cool down a little bit. You've studied real estate a whole lot more than I have, but what do you think about this story? Could that be an unfair comparison?

Anthony Schiavone: Well, usually with real estate, when you see an industry, a property type that has such strong rental growth, like we're seeing in data centers right now, that typically leads to overbuilding, which eventually brings rental rates down to a more reasonable level and so evens out. That's happened for pretty much every property type you can think of Apartments, industrial, office space. The cycles all might be a little bit shorter or longer, depending on the property type, but it's generally the same.

I think manufactured housing is probably the only property type that really hasn't overbuilt. In the case of data centers, I'm not so sure because if you think about the power requirements that a data center, the needs in order to operate. That is such a huge cost for anybody developing a data center. Developing these data centers takes so long to build. I'm not so sure if it's going to be the same as all the other property types, but it's definitely going to be something interesting to watch.

Ricky Mulvey: Anthony Schiavone, appreciate you being here. Thank you for your time and insight.

Anthony Schiavone: Thanks, Ricky.

Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against some Buyer Sale stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Discover Financial Services is an advertising partner of Motley Fool Money. Anthony Schiavone has positions in AvalonBay Communities, Mid-America Apartment Communities, and Redfin. David Meier has no position in any of the stocks mentioned. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in ASML and Meta Platforms. The Motley Fool has positions in and recommends ASML, Arista Networks, Meta Platforms, Microsoft, Mid-America Apartment Communities, and Palantir Technologies. The Motley Fool recommends AvalonBay Communities, Discover Financial Services, Lowe's Companies, and Redfin and recommends the following options: long January 2026 $395 calls on Microsoft, short February 2025 $10 calls on Redfin, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The Infrastructure Behind the AI Revolution was originally published by The Motley Fool