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 increased 98 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.
Microsoft declined to comment for this story. Arista did not respond to a request for comment.
Speculation that Microsoft will build its own data center systems has been circling for a while, and Arista's executives have dealt with questions about those risks for years.
In 2016 Microsoft donated a switch operating system to Facebook's Open Compute Project. It contained data center hardware designs that lesser-known hardware makers are free to adopt, raising concern that a broader change would be coming.
But Arista contributed some of its own code to the operating system.
"Microsoft came to us and pretty much told us, they're not planning on building their own hardware," Ullal said at an event in 2016. "They're not planning on using white boxes. Very happy with the way we operate."
Ullal has maintained her optimism about Arista's business with Microsoft. On the company's most recent earnings call, she said she hadn't seen any changes in terms of customers moving to white-box switches.
Arista fell $24.82 to $244.07 on Friday, knocking about $1.8 billion off its market value.