Cisco shares dropped sharply after the company posted a record $17.3 billion quarter, a result that topped expectations on both revenue and earnings. The selloff was driven less by the headline beat and more by one detail that mattered most to investors: gross margin guidance for the next quarter came in below market expectations.
The stock fell from a Wednesday close of $123.88 to roughly $116.40 during Thursday trading, cutting market value by nearly $30 billion. The reaction highlighted a familiar market pattern in AI infrastructure: rapid growth is being rewarded only when it arrives without meaningful erosion in margin structure.
Cisco’s report showed a company benefiting from strong hyperscaler and enterprise networking demand, but also one facing a tougher mix as more sales come from large-scale hardware deployments. That tension is now central to the investment case.
Key Facts
- Cisco reported fourth-quarter revenue of $17.3 billion, up 18% year over year and above its guidance range of $16.7 billion to $16.9 billion.
- Non-GAAP earnings per share rose to $1.22 from $0.99, beating consensus near $1.17.
- First-quarter fiscal 2027 revenue guidance of $18.0 billion to $18.2 billion exceeded analyst estimates of about $16.8 billion.
- Non-GAAP gross margin fell to 66.3% from 68.4% a year earlier, while first-quarter guidance of 65% to 66% trailed consensus of 66.4%.
- Fiscal 2026 AI infrastructure orders reached $9.3 billion, including $4 billion in the fourth quarter alone.
Cisco earnings and margin outlook
On the surface, Cisco delivered the kind of quarter that would usually support a higher stock price. Revenue beat the high end of guidance, non-GAAP EPS topped expectations, and full-year fiscal 2027 guidance was raised meaningfully across both revenue and profit. Management also outlined a powerful AI-related growth trajectory, including a projection for $7.5 billion in hyperscaler AI infrastructure revenue in fiscal 2027.
What changed the market reaction was the quality of that growth. Non-GAAP gross margin declined 210 basis points year over year to 66.3%, and the company guided for another sequential step down next quarter. Investors appear to be concluding that Cisco’s strongest growth engine, hyperscaler AI networking, carries lower profitability than the software and services mix that historically supported richer margins.
That matters because Cisco entered the report with elevated expectations. The stock had climbed 61.6% year to date and nearly 76% over the prior 12 months, far outpacing the broader market. At that valuation, investors were looking not only for growth but also for evidence that the company could preserve the economics of its business while scaling AI infrastructure sales.
“Cisco cleared the revenue bar, the earnings bar and the AI bar, but the market focused on the margin trade-off behind that growth.”
Why the margin line overshadowed the beat
The mechanics are relatively straightforward. Cisco’s AI infrastructure momentum is being driven by hardware-heavy sales into hyperscalers, a customer group known for large purchase volumes and strong negotiating leverage. Product revenue climbed 24% to $13.5 billion, but product non-GAAP gross margin dropped to 64.8% from 67.5% a year earlier.
Services provided a stabilizing counterweight, with non-GAAP services gross margin improving to 71.6%, but services revenue was flat at $3.8 billion. Software revenue rose 11% to $6.2 billion, while annual recurring revenue increased just 3% to $32.1 billion. The implication is that Cisco’s faster-growing segments are not the ones delivering its highest margins, at least in the current phase of the cycle.
Order growth outside hyperscalers offered some encouragement. Total product orders increased 35% in the quarter, and rose 25% even excluding hyperscaler demand. Enterprise orders grew 21%, public sector increased 30%, and service provider and cloud orders surged 95%. That suggests the upcycle is broader than a handful of AI customers and may eventually support a healthier mix if enterprise refresh demand continues.
Implications for Investors
For investors, the key question is whether Cisco is in a temporary margin reset tied to an unusually strong buildout cycle, or entering a longer period where higher AI revenue comes with structurally lower profitability. That distinction is crucial because the stock’s rerating has already priced in a more durable growth story.
There are clear positives. Fiscal 2026 revenue reached a record $63.3 billion, up 12%, while non-GAAP EPS came in at $4.33. Fiscal 2027 guidance calls for revenue of $72.2 billion to $73.4 billion and non-GAAP EPS of $5.05 to $5.11, both comfortably ahead of prior expectations. Cisco also ended the quarter with $15.9 billion in cash, cash equivalents and investments, generated $14.2 billion in full-year operating cash flow, and returned $12.7 billion to shareholders during the fiscal year.
Still, there are risks worth tracking closely. Inventories rose to $5.69 billion from $3.16 billion, a much faster increase than overall revenue growth. Operating cash flow was flat for the full year despite a 30% rise in GAAP net income, pointing to working capital pressure. If that inventory build reflects higher input costs or lower-margin product mix locked into future shipments, gross margin pressure may persist longer than investors hope.
Valuation remains a balancing act. At roughly $116.40, Cisco trades well below its 52-week high of $130.37, but the shares still reflect optimism around AI networking demand and a broader enterprise upgrade cycle. If security, software and observability growth accelerates alongside networking, the margin picture could improve over time. If not, the market may continue to treat strong top-line growth as less valuable than before.
The next few quarters will likely determine whether Cisco’s AI expansion marks the start of a multi-year super cycle or a growth burst with lower-than-expected returns. Investors should watch gross margin, product mix, inventory trends and the pace of non-hyperscaler demand for the clearest signals.