Cisco Systems deserves more respect in AI, and its quarterly results prove it

CNBC

2 days ago

Cisco Systems on Wednesday evening beat Street estimates on both the top and bottom line with its fiscal 2025 fourth quarter results. The company also issued slightly better than expected guidance, driven by strong growth for its networking products. Revenue in the quarter ended July 26 increased 8% year over year to $14.67 billion, exceeding the LSEG-complied analyst consensus estimate of $14.62 billion. Non-GAAP earnings per share (EPS) increased 14% on an annual basis to 99 cents, beating expectations of 98 cents, LSEG data showed. GAAP stands for generally accepted accounting principles. CSCO 1Y mountain Cisco Systems 1 year Cisco stock, which is also one of the 30 names that make up the Dow Jones Industrial Average , dipped slightly in what was a choppy after-hours trading session. Shares closed at a 52-week high of $71.79 each last Friday and traded a couple of dollars below that level Wednesday night. Bottom line Overall, it was a pretty solid quarter for Cisco. The computer networking equipment and security company reported another quarter of huge order growth thanks to artificial intelligence infrastructure spending and an enterprise networking refresh cycle. When we review Cisco, we always focus on orders because that's the best leading indicator of where revenue is headed. It's always been an order story, and we liked what we saw in the fiscal fourth quarter. However, it wasn't all clean. Sure, the security segment had positive order growth as well, but it reported a big revenue miss that will raise some flags. Still, what matters to us is that Cisco has turned into a misunderstood AI play. The company is taking in billions of dollars of orders from webscale, also known as hyperscaler, customers, and big opportunities are ahead from big corporations and sovereign AI — countries expanding their capabilities and infrastructure. Hyperscalers are the household big tech names like Amazon , Meta Platforms , and Microsoft . In a market that rewards AI-exposed companies with lofty valuations, Cisco trades at a very reasonable high teens price-to-earnings multiple. That valuation is too cheap to us. Why we own it Cisco Systems is an enterprise networking equipment provider that has made big strides to appeal to webscale customers and bring in over $1 billion in AI infrastructure orders. The company has also increased its presence in the security market through its acquisition of Splunk. In addition, Cisco's long-term transition toward subscription software sales, which are sticky and come with higher margins, should help improve the stock's undemanding price-to-earnings multiple. Competitors : Arista Networks , Hewlett Packard Enterprise , Juniper Networks Most recent buy : July 28, 2025 Initiated : July 17, 2025 Some analysts believe Cisco won't get full credit for its AI business until the company breaks out when these orders will turn into revenue. During the earnings call, management explained it recognized roughly $1 billion of AI revenue from webscale customers during fiscal year 2025. We'll see if that added information helps the stock earn more credit in the weeks ahead. We are reiterating our buy-equivalent 1 rating and keeping our $78 price target for now. We initiated Cisco on July 17 and made two subsequent buys over the next two weeks. Commentary Total Product orders increased 7% in fiscal Q4 year over year with growth across all geographies, with segment revenue up 10% to $10.89 billion. Starting off with Networking , product orders increased by a double-digit rate, representing the fourth consecutive quarter of such growth. A big reason behind this order surge is Cisco's fast growing AI infrastructure business and its ability to capture share from webscale customers. The momentum in this business continued in the fiscal fourth quarter with orders exceeding $800 million, bringing the fiscal year 2025 total to over $2 billion. That's double management's original target for the year. During the earnings call, CEO Chuck Robbins pointed out that orders from four out of the top six webscale customers, each grew orders in the triple digits. Even better, two of those customers each placed total orders of over $1 billion across Cisco's four business segments in the fiscal year. One reason why Cisco has made huge strides in its AI efforts is due to a major partnership with Nvidia . The two companies have teamed up to integrate Cisco's Nexus switches with Nvidia's Spectrum-X architecture to provide what the company describes as low latency, high speed networking for AI clusters. Cisco has also integrated a security solution for AI factories. Beyond Nvidia, Robbins said Cisco has a close relationship Advanced Micro Devices and is working with AMD on some sovereign AI deals, including the one with Humain, a newly launched Saudi Arabian AI company. Cisco is also receiving orders from neocloud providers. CoreWeave , which rents out Nvidia chips to customers for AI workloads, is an example of a neocloud. Robbins said there were several large deals in the quarter from these neoclouds that were not mentioned in the disclosed webscale AI infrastructure order figure. In addition to the webscale networking order growth story, there's a strong refresh cycle happening from enterprise customers adopting the company's Catalyst 9000 switches as well as routers, wireless access points, and industrial internet-of-things, or IoT, devices. While it's still early, Robbins pointed out that enterprise AI orders are starting to ramp up and the company is growing a customer pipeline "in the hundreds of millions." By division, Networking revenue increased 12% to $7.63 billion, by far Cisco's biggest, and management called out growth across most of its portfolio. They saw double-digit growth in internet infrastructure and enterprise routing and good growth in switching. Server revenue, however, declined. The Security division, product orders increased by mid-single digits. Still, we were disappointed by the significant revenue miss, even with 9% year-over-year increase. Cisco boosted its solutions in this industry last year when it paid $28 billion to acquire Splunk, so we would have preferred to see more strength. However, Robbins is very upbeat about the future. He explained on the earnings call how orders for the newer, refreshed products within Security increased by above 20%. The weakness mostly came from its U.S. federal government business, which has been hurt by budget cuts. When backing out the federal business, the rest of world security order growth increased by double digits in the fourth quarter. Cisco has about two-thirds of its security portfolio growing above 20%, which gives management confidence in its ability to hit its long-term target of 15% to 17% growth from its Security and Observability business. Observabilit y and Collaboration grew slightly in fiscal Q4 but missed estimates. Services revenue was flat at $3.79 billion, which missed estimates. Lastly, we always appreciate Cisco's consistent approach to returning cash to shareholders. The company bought back $1.3 billion worth of stock in the quarter at an average price of $64.65. It has $14.2 billion remaining under its authorization. Guidance Cisco expects fiscal 2026 first quarter revenue of $14.65 billion to $14.85 billion. The midpoint of $14.75 billion is a beat against the consensus of $14.62 billion. It also sees non-GAAP EPS of 97 to 99 cents. The midpoint of 98 cents is a penny higher than the consensus. For the full-year 2026, Cisco expects revenue of $59 billion to $60 billion. The midpoint of $59.5 billion is a slight beat against the consensus of $59.4 billion. It sees non-GAAP EPS of $4 to $4.06. The midpoint of $4.03 is a penny higher than estimates. (Jim Cramer's Charitable Trust is long CSCO, AMZN, META, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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