Cisco had the kind of quarter that usually gets rewarded: record revenue, stronger adjusted earnings, and a sharp increase in AI infrastructure business. Instead, the stock sold off on Thursday. The market’s complaint is not growth. It is profitability.
Cisco’s AI opportunity is increasingly tied to networking hardware, and that business can carry lower margins than some of the company’s other revenue streams. Investors are now trying to decide whether today’s margin pressure is simply the cost of capturing more AI business or something that could weigh on profits for longer. That matters for growth investors, but also for shareholders who own Cisco for income and want dependable cash flow and dividends.
Cisco’s Quarter Was Strong, but Expectations Were Even Higher
Cisco gave investors almost everything they wanted in fiscal Q4 2026, except the number the market suddenly cared about most. Revenue rose 18% year over year to $17.3 billion, while adjusted, or non-GAAP, earnings reached $1.22 a share. Hyperscaler AI infrastructure orders hit $4 billion in the quarter and $9.3 billion for the full year. Cisco also expects about $7.5 billion of AI infrastructure revenue in fiscal 2027. Even so, the stock sold off hard Thursday after a roughly 63% year-to-date run into earnings. The numbers were strong, but the bar was already high. That is a useful reminder for long-term investors: a good quarter can still disappoint when expectations are even better.
Margin Pressure Is the Number Investors Should Watch
The pressure point is gross margin, which is the percentage of revenue left after the direct cost of delivering products and services. Cisco’s adjusted total gross margin fell to 66.3% from 68.4% a year earlier, while adjusted product margin slipped to 64.8% from 67.5%. Management guided first-quarter fiscal 2027 gross margin to 65% to 66%. Services revenue was essentially flat at $3.79 billion. Inventory also rose to $5.69 billion from $3.16 billion, and full-year operating cash flow was flat at $14.2 billion. For investors who own Cisco partly for income, those numbers matter more than a one-day stock move because sustained cash generation helps support dividends and buybacks.
Wall Street Is Still Raising Cisco Price Targets
Wall Street is not treating the margin issue as the end of Cisco’s growth story. Morgan Stanley and KeyBanc raised their price targets to $135, Wells Fargo moved to $150, Rosenblatt to $165, and Barclays to $123. UBS and BNP Paribas also lifted their targets Thursday, so the original five-firm count was already stale by the afternoon. That range is important. A price target is an analyst’s estimate, not a promise, and the spread from $123 to $165 shows how differently firms are valuing the same AI opportunity. The bullish case is that higher networking volume eventually outweighs thinner hardware margins. The cautious case is that profitability stays under pressure longer than investors expect.
What Long-Term Investors Should Watch Next
Cisco’s outlook still points to substantial growth. The company expects first-quarter fiscal 2027 revenue of $18.0 billion to $18.2 billion and adjusted EPS of $1.32 to $1.34. Full-year guidance calls for $72.2 billion to $73.4 billion of revenue and adjusted EPS of $5.05 to $5.11. Cisco also declared a $0.42 quarterly dividend, payable Oct. 21, 2026, to shareholders of record Oct. 2, although future dividends remain subject to board approval. Retirees and income-focused investors should watch three things next: whether margins stabilize, whether AI orders turn into profitable revenue, and whether cash flow keeps supporting shareholder returns without stretching the balance sheet.