Cisco Just Raised Its AI Forecast Again. Is it a Buy?
The networking giant's AI business is growing much faster than its valuation suggests.
Cisco Systems, once considered a traditional tech firm, has emerged as a potential player in the rapidly growing AI sector. The company's latest earnings report, released in its fiscal first quarter, indicates it should be on the radar of AI-focused investors. Cisco's revenue surged 24% year-over-year to $18.5 billion, while adjusted earnings per share increased 40% to $1.40, both surpassing analysts' expectations.
The most impressive statistic is Cisco's forecast for $9 billion in AI infrastructure revenue from hyperscalers by 2027, up from $7.5 billion previously forecasted in August and more than double the $4 billion generated in fiscal 2026. Cisco CEO Chuck Robbins emphasized that the company is at the beginning of a networking super cycle driven by AI deployments, with enterprise adoption still in its infancy.
Despite the positive earnings, Cisco's shares experienced a drop of over 6% the following day. The report did have some drawbacks, such as higher memory costs and a shift towards hardware, which lowered Cisco's adjusted gross margin by 2.5 percentage points to 65.6%. Additionally, product order growth slowed to 21% from 35% in the previous quarter.
However, Cisco's strong performance and attractive valuation make it an intriguing option for investors seeking exposure to AI without paying a premium. The company has a dividend yield of around 1.8% and repurchased $2 billion of stock in the last quarter, both of which could contribute to total returns for investors. With Cisco's AI revenue expected to surge and its overall top line growing at over 20%, the company's total returns may outperform the market.
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