Cisco

Cisco's fourth-quarter results topped guidance, as revenue rose 18% year over year to $17.3 billion. Fiscal 2027 guidance implies another year of double-digit revenue and earnings growth, with hyperscaler artificial intelligence revenue expected to be $7.5 billion, up from $4 billion this year.

Why it matters: Cisco is converting AI demand into revenue faster than anticipated, while its momentum across campus and enterprise remains healthy. We believe Cisco has a durable, sticky position in AI networking and optics, structurally raising its growth profile. The company booked more AI infrastructure business than what it recognized as revenue, leaving a healthy backlog that should start flowing in the coming year. Specifically, AI orders reached $9.3 billion in fiscal 2026, with Cisco having converted roughly $4 billion into revenue. Campus orders grew 20%, as customers refreshed aging infrastructure. We expect AI workload growth to continue to support refresh-cycle demand running into the next year. Encouragingly, we expect the cycle to remain a meaningful growth driver even as AI becomes a larger piece of Cisco.

The bottom line: The quarter reinforces our view that AI is becoming a strong tailwind, adding to the healthy networking opportunity. We maintain our $115 fair value estimate for wide-moat Cisco, and after shares moved slightly lower on the release, we view the stock as fairly valued. Our valuation implies Cisco being worth 20 times our estimate of fiscal 2028 earnings. This is at the high end of the firm's historical range, but we believe a higher multiple is warranted, given structurally improved long-term growth on higher AI and campus forecasts. Profitability remains strong despite mix pressures, with non-GAAP gross margins and operating margins of 66.3% and 35.9%, respectively. We expect gross margin pressure to persist into fiscal 2027, but to be offset by operating leverage as hyperscaler volumes scale with minimal incremental expenses.

Our fair value estimate for Cisco Systems is $115 per share. Our valuation implies a fiscal 2027 adjusted price/earnings of 21 times, a fiscal 2027 enterprise value/sales of 6 times, a free cash flow yield of 4%, and a next-12-month dividend yield of 1%. Our biggest drivers of Cisco’s valuation are the growth of its core networking business across both campus and AI environments.

We forecast 11% compound annual growth for Cisco through fiscal 2031. We think its largest core networking business, including services, will grow rapidly over the next five years at an annualized rate of 15%. Cisco holds its strongest and largest presence in campus and enterprise networking, where we expect a stronger refresh cycle through 2028 to drive higher growth. We also forecast AI orders to augment Cisco’s networking growth, and expect this to become a more significant growth driver for Cisco’s networking business over time. AI revenue was $1 billion (2% of sales) in fiscal 2025, and more than $4 billion (7%) in fiscal 2026. We forecast this rising past $20 billion (20%-25%) at the end of the decade. Networking growth tapers from 23% in fiscal 2026 to 10% in fiscal 2031 in our forecast as Cisco exits the campus refresh cycle and AI infrastructure investment growth tapers down (while remaining strong). This remains well above our historical expectations for Cisco’s midcycle networking growth, which were closer to 4%. We think AI is structurally raising the business’ growth profile across data centers and enterprise environments.

Though security has lagged peers in recent history, we think it can slow market share losses with a more streamlined, feature-rich, cloud-based platform and more observability integration. Splunk’s portfolio should help here. Still, we do not model Cisco hitting its security organic growth target of 15% to 17%, which looks lofty to us against historical organic growth in the mid-single digits. In collaboration products, we observe market share losses to competitors like Zoom and Microsoft, and expect submarket, low growth for these sales going forward.

Non-GAAP gross margins in our model stay steady in the mid- to high-60% range. We expect slight margin compression in the short term, via a higher mix of cloud customers with substantial AI growth, also leading to a higher mix of hardware revenue at lower margins than software. In the short term, Cisco may face mild margin compression from rising input prices (that is, for memory), but we expect the firm to pass on pricing inflation to customers over the long term. We do expect operating margin expansion with higher volumes, and we forecast non-GAAP operating margin rising toward 40% in fiscal 2031 from 34% in fiscal 2025.

We assign Cisco Systems a wide economic moat rating stemming from customer switching costs. We think Cisco’s offerings for networking and cybersecurity are comprehensive and intertwined, with integrated software, hardware, and services creating a sticky overall solution and creating pricing power. These competitive advantages give us confidence in Cisco earning economic profits, more likely than not, over the next 20 years.

Cisco is a dominant force in enterprise networking and the only provider we see with a complete end-to-end portfolio for both on-premises and the cloud. Cisco’s switches, wireless access points, routers, and networking software allow enterprises to create local networks and give those local networks access to private clouds, public clouds, and the internet. Cisco holds a high market share in nearly every subsection of the enterprise networking market, including campus and data center switching, networking software, routing, software-defined wide-area networking, or SD-WAN, and wireless access.

Once Cisco is embedded in a business, it becomes hard to rip Cisco out. Refreshing networking hardware is a headache regardless, but it is even more fraught when switching vendors. Refreshing hardware can lead to partial network and application downtime, and costs time, money, and effort on part of an IT department to ensure new hardware and software fit in seamlessly. This leads to longer and more costly implementation, at best. At worst, it risks losing critical data or functionality of portions of the network and applications.

Cisco is building upon the existing stickiness of its networking equipment by integrating its software and hardware. In our view, software is just as critical as hardware to an enterprise’s networking needs, if not more so. Cisco’s software gives IT departments a broad dashboard with visibility throughout the network. This can show malfunctioning hardware, show traffic between all endpoints, and even provide artificial intelligence-powered suggestions to solve problems. Highly integrated software augments switching costs, given IT departments take time to develop workflows specific to their vendor.

We believe Cisco solidifies its switching costs with an expansive ecosystem of technologist certifications and a large training pipeline. Cisco certifications are a bellwether for competence in the IT industry, and provide an added switching cost for firms using Cisco hardware. With Cisco being the large incumbent in networking, aspiring IT professionals seek out Cisco certifications to bolster a resume. For a hiring manager, IT professionals with Cisco certifications reduce onboarding friction, and switching vendors would require certifying the whole IT department on new standards.

Cisco's switching costs provide it with pricing power for its networking products. Cisco customers readily pay a premium for its equipment, resulting in steady gross margins in the mid-60% range that are matched only by high-speed networking provider Arista Networks. As one example, China-based competitor Huawei actually ships the most 10-gigabit and 25-gigabit switches globally, but Cisco’s revenue triples that of Huawei for these products.

Cisco is a strong incumbent vendor for network firewalls but has a rounded portfolio, including identity access management, cloud security, endpoint security, zero trust, and threat intelligence. We see cybersecurity software as eliciting switching costs, resulting from the depth by which it is embedded in enterprise networks. To change a cybersecurity vendor, a customer incurs the time and expense of getting up to speed on a new system, along with the expense of running both systems concurrently during the transition. Finally, the customer risks breaches during the vulnerable transition.

We don’t view Cisco as offering best-of-breed capabilities in any point solution for security, but we view the ability to offer robust capabilities across the spectrum of security as a competitive advantage. We believe IT departments want to consolidate their cybersecurity vendor lists. A high quantity of vendors can lead to overlapping capabilities and inundated IT departments that are less familiar with each individual vendor and less effective at resolving individual threats. We don’t foresee any IT department locking itself into a single vendor, but the ability to consolidate a few functions with one strong vendor is attractive. This drives demand for Cisco’s security platform and leads to stickier customers. The more points of Cisco’s platform a customer uses, the more integrated it becomes in the organization, and it becomes even harder to replace.

We believe that security and networking are converging, especially as multi-cloud and hybrid cloud environments become the norm. Cisco, as a preeminent provider of both, is in an advantaged position to win new customers and cross-sell within existing customers. Many of Cisco’s sales feature a combination of networking hardware, networking software, and security software. We view a direct relationship between the number of products a customer adopts and Cisco’s stickiness within that customer. It may be easier, more cost-efficient, and less risky for an existing Cisco customer pursuing a new security product to up its subscription rather than sourcing from a whole new vendor. It would also be difficult to replace a point offering from Cisco, given its integration with networking software and other security offerings.

Cisco’s sticky products embed themselves in customers and give the firm pricing power that leads to strong margins and returns on invested capital. Even against robust competition and a rapidly evolving technological landscape, Cisco has done well to gently expand its margins with software. Even as competitive threats persist, we are confident in Cisco’s ability to generate excess returns above its cost of capital, more likely than not, over the next 20 years.

Cisco holds dominant market shares across many parts of networking, and leading shares in areas like switching software and software-defined wide-area networking, or SD-WAN, bode well for its position in the next era.

Cisco’s AI revenue opportunity is immense, and growing quickly. AI should raise the firm’s overall growth profile going forward, for both training opportunities in large data center and enterprise inference appl

Cisco’s balance sheet is strong and it generates impressive free cash flow. It is shareholder-friendly and sends most of its free cash flow back to shareholders.

Cisco has historically generated low growth, and recently higher AI-driven growth could be finite.

Cisco has lost market share in networking and security to pure-play competitors. If these market share losses continue, it could hamper Cisco’s growth opportunity in its core markets.

Cisco is prone to cyclicality in customer spending. This cyclicality risks becoming more severe with AI spending, and investors may be concerned with the durability of high AI spending, risking a correction longer-term.