Shares of Cisco Systems experienced a notable decline in after-hours trading despite the company exceeding expectations in its latest earnings report for the fiscal 2026 second quarter. The networking giant reported a year-over-year revenue increase of 10%, reaching $15.35 billion, surpassing the analyst consensus estimate of $15.12 billion. Adjusted earnings per share (EPS) also rose, climbing 11% from the previous year to $1.04, beating projections of $1.02 according to LSEG data.
However, the stock fell approximately 7% in extended trading, erasing much of its year-to-date gains. Leading up to the earnings report, Cisco traded at all-time highs, but concerns surrounding its elevated valuation relative to historical levels led to profit-taking by some investors. Despite a strong quarter on paper, the drop in share value raised eyebrows, particularly as Cisco had previously bucked the overall trend of declining tech stocks.
While Cisco demonstrated robust demand for its products, not all aspects of the report were without challenges. First among these was the impact of rising memory prices, which significantly affected gross margins. The global memory shortage, which has driven prices up, poses a considerable challenge since Cisco’s hardware relies heavily on various types of memory. CEO Chuck Robbins discussed the company’s proactive strategies for mitigating this issue, which include adjusting product prices and renegotiating terms with channel partners and customers.
In addition to memory price concerns, Cisco’s Security segment reported ongoing weakness, missing analysts’ forecasts for the fourth consecutive quarter. Despite management’s optimism regarding new products in this area, the results have yet to reflect significant improvements. Security revenue, at approximately $2 billion, is a smaller segment compared to Networking, which earned $8.29 billion, indicating the magnitude of the challenge.
Another factor influencing the stock’s performance is its premium valuation, which has been notably higher amid investor enthusiasm for artificial intelligence (AI) opportunities. Historically, Cisco has traded at a mid to high teen price-to-earnings multiple but has jumped to around 20 times forward earnings due to growing bullishness around AI. Although the elevated valuation typically raises risks for future earnings reports, the strong order momentum suggests potential for continued growth.
Orders increased by 18% year-over-year, accelerating from 13% in the previous quarter, with demand driven by hyperscale customers building out their data centers. Notably, Cisco received $2.1 billion in orders for its AI infrastructure solutions, reflecting a significant uptick from previous quarters. The company raised its expectation for AI orders from hyperscalers from $3 billion to over $5 billion for the fiscal year.
In contrast, the Collaboration and Observability segments saw revenue growth of 6% and remained flat, respectively. The Collaboration unit, which includes the Webex suite, surpassed estimates, whereas Observability did not meet expectations. Services revenue fell by 1% year-over-year, also missing projections.
During the quarter, Cisco repurchased 18 million shares at an average price of $76.29, totaling $1.4 billion. The company still has $10.8 billion left under its share buyback authorization and announced a slight increase in its quarterly dividend to 42 cents per share, yielding around 2%.
Looking ahead, Cisco has forecasted third-quarter revenue between $15.4 billion and $15.6 billion, exceeding the consensus estimate of $15.19 billion, while projecting non-GAAP EPS in line with consensus at $1.02 to $1.04. The company raised its full-year revenue outlook by $1 billion at the low end and $700 million at the high end, now expecting revenues between $61.2 billion and $61.7 billion—a midpoint above previous estimates.
Overall, while Cisco’s latest earnings report showed significant growth, various challenges, including rising costs and segment-specific weaknesses, led to a decline in its stock. Analysts remain optimistic regarding long-term growth potential, particularly in the AI sector, while adjusting their price targets to account for the recent pullback.
