Networking Giant Drops on Earnings: Time to Load Up on Cisco?

The past few years we’ve seen major tech companies literally transform. Cisco Systems is a great example, evolving from a hardware-centric giant to a software and services powerhouse.

The story surrounding Cisco’s stock is one for the history books. The stock spent much of the early 2000s recovering after the tech bubble burst, finally regaining steam in the mid-2010s. Shares finally eclipsed those dot-com highs in late 2021, reaching unforeseen heights as the company entered a new era.

Cisco, the San Jose-based networking leader, has experienced a steady progression in recent years to become a more diversified and recurring-revenue-focused entity. Driven by cloud and security expansions, the stock’s outperformance underscores Cisco's appeal.

Cisco’s Evolution into an AI Networking Giant

Cisco's multi-year ascent reflects strategic pivots that have positioned it well in a digital-first world. The acquisition of Splunk in 2024 for $28 billion marked a milestone, bolstering observability and cybersecurity capabilities—areas where recurring subscriptions now drive over 50% of revenue.

This shift from one-time hardware sales to software-as-a-service (SaaS) models has enhanced predictability, with annual recurring revenue (ARR) growing steadily. In recent years, Cisco has also capitalized on the AI infrastructure boom, with Ethernet switching and AI-optimized networking solutions gaining traction among hyperscalers. The company's Silicon One chips and Nexus platforms have enabled it to compete in high-speed data center interconnects, complementing its core routing and switching dominance.

Last year’s performance built on these foundations, with shares benefiting from broader enterprise spending recovery and Cisco's role in hybrid work environments. Security revenue grew double-digits, while collaboration tools like Webex integrated AI features to improve user experiences.

Economic resilience—despite inflation concerns—supported IT budgets, allowing Cisco to maintain mid-single-digit revenue growth and expand margins through cost disciplines. Dividend increases and share repurchases further rewarded shareholders, with an annual dividend yield around 2% adding to total returns.

Is Today’s Pullback a Buying Opportunity?

Prior to today’s earnings-induced move, Cisco's outperformance year-to-date had been notable, particularly against a backdrop of tech sector volatility. While AI pure-plays like Nvidia faced questions on valuation and demand sustainability, Cisco's diversified exposure—spanning networking, security, and observability—provided stability.

The stock's climb to all-time highs in early February reflected optimism around AI order ramps, with management teasing over $5 billion in annual AI infrastructure bookings.

Yesterday evening’s earnings release for the company’s fiscal second quarter saw Cisco deliver revenue of $15.35 billion, up nearly 10% year over year—exceeding consensus estimates of $15.12 billion. Earnings per share reached $1.04, up 11% and topping forecasts by $0.02. The company highlighted $2.1 billion in AI infrastructure orders for the quarter, raising full-year expectations to over $5 billion—signaling robust demand from hyperscalers for Silicon One-based systems and optics.

Despite these beats, CSCO shares dipped approximately 11% in early trading on Thursday, likely due to guidance that tempered near-term enthusiasm. For Q3 FY2026, Cisco projected revenue of $15.4-$15.6 billion (up 5-7% YoY) and adjusted earnings of $1.02-$1.04—solid but perhaps below some aggressive whispers.

Mentions of elevated memory costs and inventory adjustments may weigh on margins. CEO Chuck Robbins emphasized the "slow and steady climb" in enterprise adoption, while noting AI's early diffusion phase, but investors appeared focused on the absence of a more pronounced upside surprise.

Currently, Cisco CSCO holds a Zacks Rank #2 (Buy), reflecting balanced expectations with positive earnings estimate revisions. Consensus estimates for FY2026 align with guidance, but Q4 and beyond could see upward adjustments if AI orders convert efficiently.

Bottom Line

In my view, today’s reaction overlooks the company’s underlying health. Cisco's ARR growth and subscription mix provide visibility, while investments in AI networking position it for multi-year tailwinds. The company also announced a 2% dividend increase to $0.42 per share, reinforcing its shareholder-friendly stance.

In an environment where tech rotations favor value over pure growth, Cisco's blend of innovation and stability feels sincere. Risks like competition in AI silicon or enterprise spending slowdowns persist, but the company's scale and ecosystem provide defenses.

Reflecting on Cisco's journey—from dot-com icon to modern enabler—reminds us how adaptability endures. For astute investors, the post-earnings dip could represent an opportunity to engage with a tech stalwart at reasonable terms.

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This article originally published on Zacks Investment Research (zacks.com).

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