Cisco Systems (NDQ:CSCO): Will this US$300bn company really be a winner from the AI boom? Investors aren’t so sure

As a big company in the networking equipment space, Cisco Systems (NDQ:CSCO) is a company you could be forgiven for thinking will be a winner from AI just by being there. But investor reaction to its latest results suggest investors are currently skeptical.

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Overview of Cisco Systems

Cisco was founded in 1984 in San Francisco by Leonard Bosack and Sandy Lerner, two computer scientists from Stanford University who created a device to connect disparate computer networks — an early multi-protocol router. That innovation laid the foundation for the company’s rise as a leader in networking hardware.

From those beginnings, Cisco expanded throughout the 1990s and 2000s into a broad portfolio of routers, switches and other networking equipment that underpin the global internet and enterprise networks, growing through both product development and acquisitions.

Over the decades its business has shifted increasingly toward software, security, subscription services, and network management tools, reflecting the industry’s evolution toward integrated hardware-software solutions. A notable part of this transformation was the 2024 acquisition of Splunk, a major provider of security analytics and data-intensive software, which broadened Cisco’s reach into cybersecurity and observability.

An AI winner?

Today Cisco’s product and service portfolio still includes the networking equipment it is best known for, such as enterprise and data-centre switches and routers, but also next-generation AI-optimised network silicon (like its Silicon One family of chips), software for network and security management, unified communications, and cloud-centric services.

It is one of the largest suppliers of the infrastructure that connects servers, storage and cloud systems — a set of technologies that are essential to modern IT environments in enterprises, service providers, and increasingly for AI infrastructure.

Sounds like the case for Cisco to be an AI winner is strongly affirmative, doesn’t it? Well, investor reaction to its most recent results (a 12% drop in a day last Thursday February 12) showed investors are sceptical about that, or at least that the company’s pursuit will be cheap. Memory costs are sky rocketing and this is a problem many other tech players are facing such as Apple, Dell and Qualcomm. And Cisco’s CEO Chuck Robbins said Cisco would have to raise prices, revise contracts and negotiate terms to account for spiralling component prices.

The outlook

For the third quarter of fiscal 2026 (the quarter ending April 2026), Cisco expects revenue in the range of about $15.4bn to $15.6bn, with non-GAAP gross margins between roughly 65.5% and 66.5%, non-GAAP operating margins around 33.5% to 34.5%, and non-GAAP earnings per share (EPS) of $1.02-$1.04 with GAAP EPS of $0.73-$0.77 for that quarter.

For the full fiscal year 2026, Cisco guided to revenue of approximately $61.2-$61.7bn, non-GAAP EPS of roughly $4.13-$4.17, and GAAP EPS around $3.00-$3.08. These ranges include the company’s assumptions about tariffs and tax provisions and reflect its expectations for continued AI-related demand alongside broader networking and software growth.

But the guidance implied continued margin pressure due to rising component costs and mix shifts. In the previous fiscal year, the company made $56.7bn (up 5%), and non-GAAP EPS of $3.81. So if the result was replicated it would be 8-9% growth in both cases. However, it had guided to EPS of $4-4.06 for the year ahead.

The concern isn’t necessarily that Cisco won’t grow, but that the pace of growth and margins may not justify a much higher valuation, especially relative to growth-oriented peers.

The guidance suggests continued progress, but the fact that Cisco’s stock reacted negatively even to this stronger guidance reflects lingering scepticism that the company will rapidly transform into an AI-centric growth juggernaut rather than a stable but mature networking and infrastructure provider. Yes, the revenue growth is there, but will profitability growth be there? Investors are not so sure.

Analysts covering the company expect growth in the short to medium term – they have a mean target price of US$88.81, implying 15% share price growth. They call for $61.6bn revenue, $4.16 non-GAAP EPS and $3.06 GAAP EPS for fiscal year 2026. In the year thereafter, $65bn revenue, $4.52 non-GAAP EPS and $3.43 GAAP EPS. Cisco’s multiples are not that high – at 17x for the next fiscal year, although its PEG is 2.5x.

What about the longer term?

Cisco’s management has talked publicly about longer-term AI momentum specifically. Even for fiscal 2026, the company lifted its AI infrastructure orders outlook to more than $5bn and expecting to recognise roughly $3bn of that in revenue from hyperscale customers — a signal that it sees AI demand as an increasingly meaningful contributor to the company’s growth.

The question of whether Cisco can be an AI winner taps into two trends. First, the AI era places enormous demands on networking and data-movement performance — GPUs and accelerators can only be fully productive if the network fabric supports massive data flows with low latency. Cisco’s networking chips, optics and switches are positioned to benefit from this trend,

Second, Cisco is trying to embed AI more directly into its software and platforms, such as tools for network automation, security with AI detection and response, and enterprise-oriented AI workflow support.

Both of these could help. At the end of the day, the company is still growing, its networking gear is embedded at the core of AI data centers, and it’s building out software and security offerings that leverage AI more directly.

However the bottom line is not – at least not at the moment. Overcoming operating margin headwinds and turning AI demand into a demonstrable earnings trajectory that excites investors will be key to dispelling scepticism about its prospects as a true “AI winner.”

Analysts will watch not just AI order growth but whether Cisco’s higher-value software and subscription revenue can grow faster than hardware, and whether costs can be controlled as component prices and competitive pressures shift.

Conclusion

Cisco Systems is experiencing bottom line difficulties as the AI boom proves more costly to capitalise on than investors positioned. Ultimately investors should not forget that Cisco has the assets and market position that align with AI infrastructure demand, and its transition into software and security broadens its addressable opportunity.

The most recent quarterly results validate that demand is real, but they also underline that translating that demand into expanded margins and strong investor confidence is still a work in progress.