Cisco Drops 10% Post Q4 Earnings: Buy, Sell or Hold the Stock?

Cisco Systems CSCO shares dropped 10% after reporting fourth-quarter fiscal 2026 results on Aug. 12. The decline can be attributed to investor concerns around margin pressure and the quality of forward growth despite very strong top-line results. Revenues increased 18% year over year to $17.3 billion, with product orders jumping 35%. Non-GAAP earnings increased 23% year over year to $1.22 per share. However, non-GAAP gross margin fell 210 basis points (bps) year over year to 66.3%, and product gross margin declined 270 bps to 64.8%, reflecting a higher hardware mix and rising memory costs. 

Cisco expects first-quarter fiscal 2027 gross margin in the 65-66% range and acknowledged that the rapid growth of hardware-heavy AI and networking businesses is likely to remain a gross-margin headwind through fiscal 2027. Management also implied growth of roughly 13% between fiscal second and fourth quarters. Recurring indicators were comparatively softer, with Annual Recurring Revenues (ARR) growing only 3%, while services revenue was essentially flat.

So, what should investors do with CSCO stock? Let’s find out.

AI Push & Strong Networking Growth Aids Cisco’s Prospects

Cisco shares have jumped 44.9% year to date (YTD), outperforming the broader Zacks Computer & Technology sector’s return of 18.8%. The company has been benefiting from a strong AI push, a networking supercycle, improving its enterprise networking business and recovering its security business. These factors have helped in improving Cisco’s competitive prowess compared with the likes of Hewlett Packard Enterprise HPE, Broadcom AVGO and Arista Networks ANET, shares of which have appreciated 131.9%, 9.9% and 47.5%, YTD, respectively.

CSCO Price Performance

Image Source: Zacks Investment Research

Hyperscaler AI infrastructure orders reached $9.3 billion in fiscal 2026, roughly 4.5 times fiscal 2025, while Cisco expects hyperscaler AI revenue to rise from about $4 billion in fiscal 2026 to $7.5 billion in fiscal 2027. Cisco is well-positioned across AI networking through Silicon One systems, Acacia optics and optical networking, with multiple new hyperscaler design wins and additional opportunities in the pipeline. The scale-across opportunity is noteworthy because Cisco estimates AI-based inter-data-center traffic may require roughly 14 times the bandwidth of traditional data-center interconnects. 

Beyond hyperscalers, Cisco sees a more than $100 billion networking refresh opportunity, supported by enterprise data-center modernization and a multi-year campus refresh cycle. In the fourth quarter of fiscal 2026, campus orders increased 20% and only about 7% of the campus switching installed base had been refreshed by the end of fiscal 2026. 

Security and observability should provide another growth leg as AI expands the threat surface. In the fourth quarter of fiscal 2026, firewall orders grew more than 30%, with 6,400 customers adopting Cisco’s newer security products, and Splunk is increasingly being integrated into broader security offerings. In the core security portfolio, over 1,500 customers purchased Cisco’s new products, including Secure Access, XDR, Hypershield and AI Defense in the fourth quarter of fiscal 2026.

CSCO Suffers From Margin Pressure

Cisco suffers from the shift in the business mix toward lower-gross-margin AI infrastructure hardware. The company expects higher hardware volumes to create continued gross-margin pressure, even though operating leverage and expense discipline is expected to help preserve operating margins. AI orders also tend to be very large, nonlinear and placed well in advance, which makes the timing of revenue conversion less predictable and can increase quarterly volatility. 

Security remains a headwind. Cisco noted that fiscal fourth-quarter’s 14% growth in security revenues benefited from several sizable, longer-duration on-prem Splunk transactions and expects fiscal 2027 security growth to normalize toward the high-single digits.

Fiscal 2027 Earnings Estimate Revisions Positive for CSCO

The Zacks Consensus Estimate for CSCO’s fiscal 2027 earnings is currently pegged at $4.89 per share, up 2.3% over the past 30 days, indicating year-over-year growth of 12.93%.
 

The consensus mark for CSCO’s first-quarter fiscal 2027 earnings is currently pegged at $1.18 per share, up 2.6% over the past 30 days, indicating year-over-year growth of 18%.

CSCO Shares Are Trading at a Premium

Cisco shares are trading at a premium, as suggested by the Value Score of F. In terms of the forward 12-month price/sales, CSCO is trading at a premium of 6.31X, higher than the Zacks Computer Networking industry’s 5.76X and Hewlett Packard Enterprise’s 1.49X. 

However, Cisco shares are trading at a discount compared with Arista Networks and Broadcom. In terms of the forward 12-month P/S, Arista Networks and Broadcom shares are trading at 16.93X and 11.2X, respectively.  

CSCO Stock’s Valuation

Image Source: Zacks Investment Research

Conclusion

Cisco’s strong AI momentum, expanding hyperscaler opportunity, ongoing networking refresh cycle and improving security portfolio provide a solid foundation for long-term growth. However, persistent gross-margin pressure from the growing mix of hardware-heavy AI infrastructure, uneven revenue conversion from large AI orders and relatively soft recurring revenue growth remains a concern. Moreover, CSCO’s premium valuation limits the margin of safety following the stock’s strong year-to-date performance.

Given these competing factors, holding CSCO shares appears appropriate at current levels. Existing investors may benefit from the company’s expanding AI and networking opportunities, while prospective investors may prefer to wait for a more attractive entry point or clearer evidence that accelerating revenue growth can translate into stable gross margins and sustained earnings expansion.

CSCO currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks' Research Chief Names "Stock Most Likely to Double"

Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.

This top pick is a little-known satellite-based communications firm. Space is projected to become a trillion dollar industry, and this company's customer base is growing fast. Analysts have forecasted a major revenue breakout in 2025. Of course, all our elite picks aren't winners but this one could far surpass earlier Zacks' Stocks Set to Double like Hims & Hers Health, which shot up +209%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research