Cisco Systems: AI-Fueled Beat and Raise Drives Price Target Hike

Cisco Systems (CSCO) shares surged in after-hours trading Wednesday, fueled by a stronger-than-expected quarterly performance and an optimistic forward outlook. The networking giant’s robust Q1 2026 results, underpinned by double-digit order growth, affirm its position as a key player benefiting from the ongoing AI infrastructure boom.

For the fiscal first quarter ended October 25, Cisco reported revenue of $14.88 billion, an 8% year-over-year increase, surpassing analyst estimates of $14.76 billion according to LSEG data. Non-GAAP earnings per share reached $1.00, exceeding expectations of $0.98.

The market responded positively, with shares jumping over 7% after-hours to nearly $80, building on a 3% gain during regular trading. A break above $80.06 would mark a new all-time high since March 2000. Year-to-date, Cisco shares have climbed approximately 25% as of Wednesday’s close.

This surge reflects a deserving response to a strong quarter, characterized by accelerating product order growth, particularly driven by artificial intelligence-related demand. CEO Chuck Robbins highlighted a “deepening” relationship with existing clients as a key factor during the earnings call, alongside a “major multi-year, multi-billion-dollar campus networking refresh cycle” now underway. This refresh isn’t just about replacing old gear; it’s about laying the groundwork for future AI deployments and increased bandwidth demands in the modern enterprise.

While the overall picture was bright, the security business presented a challenge, with revenues declining year-over-year and falling short of estimates. Management attributed this shortfall to revenue recognition timing issues, specifically related to the shift towards cloud-based subscription models for its Splunk offerings which Cisco acquired in March 2024. This transition, while impacting short-term revenue recognition, is expected to be accretive in the long run due to the stickier nature of subscription-based revenue and the enhanced ability to deliver innovation faster especially within the AI realm.

Another concern addressed was the potential impact of government shutdowns on Cisco’s federal agency business. Despite government closures, orders from this segment grew by a high single-digit percentage, with Robbins anticipating further upside once the government fully reopens.

Cisco’s appeal lies in its transformation into a provider of enterprise networking solutions tailored for cloud clients. The company has strategically expanded its presence in the security market through acquisitions like Splunk. Furthermore, the ongoing transition to subscription-based software sales promises improved margins and enhanced revenue predictability, potentially leading to a re-evaluation of the stock’s price-to-earnings multiple.

The narrative surrounding Cisco has evolved, positioning it as a sleeper AI play, fueled by substantial orders from hyperscale customers. In FY25, Cisco recognized approximately $1 billion in AI revenue from hyperscalers, with projections soaring to around $3 billion in FY26. This growth is directly tied to the increasing demand for high-performance networking solutions required to power and connect massive AI compute clusters. Cisco’s close partnerships with NVIDIA and AMD, for example, are helping drive design wins with next generation NVIDIA Spectrum-X Ethernet switches and AMD GPUs. These partnerships extend beyond supplying mere components; Cisco is providing architectural expertise and integration support to enable efficient and scalable AI infrastructure.

Despite this accelerating growth and subscription revenue now constituting over half of total revenue, Cisco’s stock maintains a reasonable price-to-earnings multiple of approximately 19.5 times based on the midpoint of management’s full-year adjusted EPS outlook. This relative undervaluation stems from a historical perception of Cisco as a legacy networking company, a perception that is increasingly being challenged by its strategic moves into AI and cloud.

Total product orders increased by 13% year-over-year, accelerating from 7% growth in the prior quarter, reflecting growth across all geographies and customer markets. Product revenue grew 10% year-over-year to $7.77 billion surpassing estimates. Within the networking segment, product orders grew at a high teens rate, marking the fifth consecutive quarter of double-digit growth. AI infrastructure orders from hyperscaler clients serve as a primary driver of this growth, with Cisco securing $1.3 billion in orders during the quarter, accelerating from over $800 million in the prior quarter. Notable demand was also observed for enterprise routing, campus switching, wireless, industrial IoT, and servers.

Looking ahead, Cisco anticipates fiscal 2026 second-quarter revenue in the range of $15 billion to $15.2 billion, surpassing the consensus estimate of $14.62 billion. Non-GAAP EPS is projected to be between $1.01 and $1.03, also exceeding the consensus estimate of $0.98. For the full fiscal year 2026, revenue is now projected to be $60.2 billion to $61 billion, up from the prior outlook of $59 billion to $60 billion, again exceeding the consensus estimate of approximately $59.64 billion. Similarly, management raised its EPS forecast to $4.08 to $4.14, compared to its previous outlook of $4.00 to $4.06.