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Cisco Drops 8% in 3 Months: Should You Buy the Stock on the Dip?
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Key Takeaways
Cisco shares fell 7.8% in three months amid margin pressure and concerns over recurring-revenue growth.
Cisco expects hyperscaler AI infrastructure revenues to rise from about $4B in fiscal 2026 to $7.5B in 2027.
Cisco sees more than $100 billion in networking refresh opportunities.
Cisco Systems (CSCO - Free Report) shares have dropped 7.8% in the past three months, underperforming the broader Zacks Computer & Technology sector’s fall of 2.6%. Cisco has underperformed peers, including Hewlett Packard Enterprise (HPE - Free Report) and Arista Networks (ANET - Free Report) , but outperformed Broadcom (AVGO - Free Report) over the same time frame. Shares of Hewlett Packard Enterprise and Arista Networks have appreciated 28.8% and 17.6% over the past three months, respectively, while Broadcom has dropped 15.5%. The decline in CSCO appears to reflect concerns around margin pressure, the revenue mix, and the sustainability of the current networking upcycle. However, does the dip offer an opportunity to take a position in CSCO shares? Let’s find out.
CSCO Price Performance
Image Source: Zacks Investment Research
Cisco Suffers from Margin Pressure
Investor concerns around margin pressure and the quality of forward growth despite very strong top-line results have been plaguing Cisco shares in recent times. The company’s fourth-quarter fiscal 2026 non-GAAP gross margin declined 210 basis points (bps) year over year to 66.3%, while product gross margin fell 270 bps to 64.8%. Cisco attributed the decline primarily to a greater mix of hardware revenue and higher memory costs, partly offset by productivity gains and pricing actions. Cisco guided first-quarter fiscal 2027 non-GAAP gross margin to 65-66%, indicating continued pressure.
The rapid expansion of AI infrastructure is contributing to this mix pressure. Cisco is shipping more hardware into hyperscale and enterprise deployments, while associated software subscriptions and services are recognized over time. The company acknowledged that this creates a timing difference that can weigh on gross margins as hardware revenue scales faster than recurring revenues.
Sluggish recurring and services growth could also be weighing on sentiment. Services revenues were essentially flat year over year at $3.79 billion in the fourth quarter of fiscal 2026. Annualized recurring revenue (ARR) increased only 3% to $32.1 billion despite total revenues jumping 18%. Observability revenues rose just 6%, while fiscal 2026 Security revenues increased only 2%. These trends contrast with the much stronger growth currently being generated by networking hardware.
Splunk is also still moving through its transition from on-premises offerings toward cloud subscriptions. The company expects this comparison to improve during fiscal 2027, but the transition has temporarily restrained reported growth. Cisco expects Security growth to improve from low-single digits in fiscal 2026 toward high-single digits in fiscal 2027.
AI Push & Strong Networking Growth Aids Cisco’s Prospects
AI infrastructure represents Cisco’s biggest emerging growth catalyst. Hyperscaler AI infrastructure orders reached $9.3 billion in fiscal 2026, roughly 4.5 times the fiscal 2025 level. Cisco generated approximately $4 billion of hyperscaler AI infrastructure revenues in fiscal 2026 and expects this figure to jump to $7.5 billion in fiscal 2027. Importantly, the AI opportunity is expanding beyond hyperscalers. Cisco recorded $1.3 billion of fiscal 2026 AI orders from neocloud, sovereign-cloud and enterprise customers.
Silicon One and optics should strengthen Cisco’s position in AI networking. The company secured new hyperscaler design wins for its P200 scale-across and G200 scale-out systems in the fiscal fourth quarter and expects additional opportunities involving the G300, G200 and P200 platforms. The company plans comprehensive adoption of Silicon One across its high-performance networking portfolio by fiscal 2029.
Scale-across networking could be particularly important as AI clusters become distributed across multiple data centers. Cisco estimates that these architectures can require roughly 14 times the bandwidth of traditional data-center interconnects and 12,000-32,000 coherent ports compared with only 1,000-2,000 traditionally. Cisco can address this opportunity through Silicon One systems, Acacia coherent optics and optical line systems.
A massive enterprise network-refresh cycle provides another durable growth driver. Cisco estimates more than $100 billion of networking refresh opportunities over the coming years. Campus networking orders rose more than 15% in fiscal 2026, yet only about 7% of Cisco’s campus switching installed base had been refreshed by fiscal year-end, suggesting substantial runway. The refresh cycle is being accelerated by AI workloads, Wi-Fi 7 adoption, higher bandwidth requirements and cybersecurity needs. Campus networking orders increased 20% in the fourth quarter, while wireless bookings advanced more than 25%. Wi-Fi 7 represented more than half of wireless bookings, creating additional demand for multi-gigabit campus switches.
Fiscal 2027 Earnings Estimate Revisions Positive for CSCO
The Zacks Consensus Estimate for CSCO’s fiscal 2027 earnings is currently pegged at $5.11 per share, up 7% over the past 60 days, indicating year-over-year growth of 18.01%.
The consensus mark for CSCO’s first-quarter fiscal 2027 earnings is currently pegged at $1.32 per share, up 14.8% over the past 30 days, indicating year-over-year growth of 32%.
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 6.01X, higher than the broader sector’s 5.95X and Hewlett Packard Enterprise’s 1.51X.
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 16.92X and 9.97X, respectively.
CSCO Stock’s Valuation
Image Source: Zacks Investment Research
Conclusion
Cisco’s near-term margin pressure, slower recurring-revenue growth and premium valuation warrant some caution. However, the company’s strengthening position in AI infrastructure, robust hyperscaler demand and sizable enterprise networking refresh opportunity support an improving growth outlook. Rising adoption of Silicon One, Acacia optics, Wi-Fi 7 and next-generation switching solutions should further expand Cisco’s addressable market. Moreover, positive fiscal 2027 earnings estimate revisions reflect improving expectations for profitability. With AI infrastructure revenues expected to accelerate and Security growth projected to improve, the recent share-price weakness could offer investors an attractive entry point into Cisco’s long-term growth story.
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Cisco Drops 8% in 3 Months: Should You Buy the Stock on the Dip?
Key Takeaways
Cisco Systems (CSCO - Free Report) shares have dropped 7.8% in the past three months, underperforming the broader Zacks Computer & Technology sector’s fall of 2.6%. Cisco has underperformed peers, including Hewlett Packard Enterprise (HPE - Free Report) and Arista Networks (ANET - Free Report) , but outperformed Broadcom (AVGO - Free Report) over the same time frame. Shares of Hewlett Packard Enterprise and Arista Networks have appreciated 28.8% and 17.6% over the past three months, respectively, while Broadcom has dropped 15.5%. The decline in CSCO appears to reflect concerns around margin pressure, the revenue mix, and the sustainability of the current networking upcycle. However, does the dip offer an opportunity to take a position in CSCO shares? Let’s find out.
CSCO Price Performance
Image Source: Zacks Investment Research
Cisco Suffers from Margin Pressure
Investor concerns around margin pressure and the quality of forward growth despite very strong top-line results have been plaguing Cisco shares in recent times. The company’s fourth-quarter fiscal 2026 non-GAAP gross margin declined 210 basis points (bps) year over year to 66.3%, while product gross margin fell 270 bps to 64.8%. Cisco attributed the decline primarily to a greater mix of hardware revenue and higher memory costs, partly offset by productivity gains and pricing actions. Cisco guided first-quarter fiscal 2027 non-GAAP gross margin to 65-66%, indicating continued pressure.
The rapid expansion of AI infrastructure is contributing to this mix pressure. Cisco is shipping more hardware into hyperscale and enterprise deployments, while associated software subscriptions and services are recognized over time. The company acknowledged that this creates a timing difference that can weigh on gross margins as hardware revenue scales faster than recurring revenues.
Sluggish recurring and services growth could also be weighing on sentiment. Services revenues were essentially flat year over year at $3.79 billion in the fourth quarter of fiscal 2026. Annualized recurring revenue (ARR) increased only 3% to $32.1 billion despite total revenues jumping 18%. Observability revenues rose just 6%, while fiscal 2026 Security revenues increased only 2%. These trends contrast with the much stronger growth currently being generated by networking hardware.
Splunk is also still moving through its transition from on-premises offerings toward cloud subscriptions. The company expects this comparison to improve during fiscal 2027, but the transition has temporarily restrained reported growth. Cisco expects Security growth to improve from low-single digits in fiscal 2026 toward high-single digits in fiscal 2027.
AI Push & Strong Networking Growth Aids Cisco’s Prospects
AI infrastructure represents Cisco’s biggest emerging growth catalyst. Hyperscaler AI infrastructure orders reached $9.3 billion in fiscal 2026, roughly 4.5 times the fiscal 2025 level. Cisco generated approximately $4 billion of hyperscaler AI infrastructure revenues in fiscal 2026 and expects this figure to jump to $7.5 billion in fiscal 2027. Importantly, the AI opportunity is expanding beyond hyperscalers. Cisco recorded $1.3 billion of fiscal 2026 AI orders from neocloud, sovereign-cloud and enterprise customers.
Silicon One and optics should strengthen Cisco’s position in AI networking. The company secured new hyperscaler design wins for its P200 scale-across and G200 scale-out systems in the fiscal fourth quarter and expects additional opportunities involving the G300, G200 and P200 platforms. The company plans comprehensive adoption of Silicon One across its high-performance networking portfolio by fiscal 2029.
Scale-across networking could be particularly important as AI clusters become distributed across multiple data centers. Cisco estimates that these architectures can require roughly 14 times the bandwidth of traditional data-center interconnects and 12,000-32,000 coherent ports compared with only 1,000-2,000 traditionally. Cisco can address this opportunity through Silicon One systems, Acacia coherent optics and optical line systems.
A massive enterprise network-refresh cycle provides another durable growth driver. Cisco estimates more than $100 billion of networking refresh opportunities over the coming years. Campus networking orders rose more than 15% in fiscal 2026, yet only about 7% of Cisco’s campus switching installed base had been refreshed by fiscal year-end, suggesting substantial runway. The refresh cycle is being accelerated by AI workloads, Wi-Fi 7 adoption, higher bandwidth requirements and cybersecurity needs. Campus networking orders increased 20% in the fourth quarter, while wireless bookings advanced more than 25%. Wi-Fi 7 represented more than half of wireless bookings, creating additional demand for multi-gigabit campus switches.
Fiscal 2027 Earnings Estimate Revisions Positive for CSCO
The Zacks Consensus Estimate for CSCO’s fiscal 2027 earnings is currently pegged at $5.11 per share, up 7% over the past 60 days, indicating year-over-year growth of 18.01%.
Cisco Systems, Inc. Price and Consensus
Cisco Systems, Inc. price-consensus-chart | Cisco Systems, Inc. Quote
The consensus mark for CSCO’s first-quarter fiscal 2027 earnings is currently pegged at $1.32 per share, up 14.8% over the past 30 days, indicating year-over-year growth of 32%.
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 6.01X, higher than the broader sector’s 5.95X and Hewlett Packard Enterprise’s 1.51X.
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 16.92X and 9.97X, respectively.
CSCO Stock’s Valuation
Image Source: Zacks Investment Research
Conclusion
Cisco’s near-term margin pressure, slower recurring-revenue growth and premium valuation warrant some caution. However, the company’s strengthening position in AI infrastructure, robust hyperscaler demand and sizable enterprise networking refresh opportunity support an improving growth outlook. Rising adoption of Silicon One, Acacia optics, Wi-Fi 7 and next-generation switching solutions should further expand Cisco’s addressable market. Moreover, positive fiscal 2027 earnings estimate revisions reflect improving expectations for profitability. With AI infrastructure revenues expected to accelerate and Security growth projected to improve, the recent share-price weakness could offer investors an attractive entry point into Cisco’s long-term growth story.
CSCO currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.