Cisco (CSCO) posted a strong fiscal fourth quarter, yet shares fell nearly 7% in early trade after the report. Both top and bottom line beat forecasts, but investors focused on a more modest AI outlook and pressure on margins.
The Numbers
Cisco (CSCO) earned $1.22 per share on $17.25 billion in revenue, both above consensus. Product revenue - networking, security, and collaboration - all came in ahead of expectations. Product orders rose 35% year over year. The company reported $4 billion of AI hyperscaler orders in the quarter and said demand stays broad across the business.
Guidance
Guidance for fiscal year 2027 came in above forecast: revenue of $72.2 billion to $73.4 billion and adjusted EPS between $5.05 and $5.11. First quarter (current quarter) guidance also topped expectations.
Why the Stock Fell
Some analysts flagged lower expected product gross margins as a key concern, with the AI hardware mix weighing on profitability. The more AI gear Cisco builds, the harder and more expensive the components are to get, which compresses margins. Investors wanted a bigger AI contribution and are questioning how sustainable the current growth acceleration is. The CEO said it is prudent to start the year on a conservative note.
Despite the drop, several firms - Wells Fargo, Key Bank, and Morgan Stanley - raised their price targets after the report. They cite confidence in Cisco's networking cycle, strong demand, and continued AI-driven opportunities through fiscal year 2027.
My Read on the Trade
The quarter looks very strong and confirms the direction of the AI trade. Networking demand is real and growth is strong. There has been healthy skepticism in the AI trade around future obligations and forward projections, and the street has discounted much of that. Cisco (CSCO) points to large remaining performance obligations (RPOs) - contracted future revenue - and says it will make a lot of money. The street is skeptical of that claim, which shows in this pullback. Margins are crucial to watch going forward.
I see this as a short pullback that will recover. Looking out to November, there are 99 days to expiration. I like the 120/130 call spread, which cost about $2.75 to $2.80 this morning to put on; it moved to about $3.10 as Cisco recovered through the morning. I expect the stock back above its pre-earnings level before November, and very likely higher.
The bigger story is Cisco's shift from a slow-moving dividend stock into part of the broader tech and AI infrastructure buildout trade. The bar going into tech earnings was high, especially for some of these names.
Broader Market
Markets hit all-time highs, with almost everything working except Cisco (CSCO) on this day. Value and growth trades were both rising. Possible drivers: good inflation data and oil trading a bit lower. After a healthy rotation and consolidation through the summer, the market started to move up. September and the fourth quarter usually bring more bullish sentiment, and seeing every group rally on the same day is a positive sign for the bulls.
