Cisco's AI Orders Surge But Stock Falls, Highlighting Valuation and Integration Concerns

What happened

Cisco Systems reported a Q2 fiscal 2026 earnings beat and raised its full-year guidance, fueled by $2.1 billion in AI infrastructure orders and a forecast exceeding $5 billion in hyperscaler AI orders. Despite this positive performance, shares sold off over 11%, reflecting investor skepticism about the sustainability of AI-driven growth amid already high valuations. The DeepValue master report notes that Cisco trades at ~28x trailing EPS, embedding expectations for mid-single-digit revenue growth and flawless execution on AI and Splunk integration. However, filings reveal that AI demand is concentrated, security/observability growth is largely acquisition-driven, and RPO trends have softened, casting doubt on recurring revenue durability. This disconnect underscores the market's cautious stance, driven by crowded AI narratives and underlying business mix risks.

Implication

The immediate implication is that Cisco's stock decline post-beat suggests limited upside unless AI orders consistently translate into sustained revenue, as per the report's base case of ~6-7% growth. Long-term, success hinges on AI infrastructure offsetting cyclical weaknesses in campus switching and servers, while delivering the guided ~$3 billion FY26 AI revenue target. Investors must monitor whether security and observability can achieve mid-teens organic growth post-Splunk integration to support software acceleration. Risks include competitive pressure from rivals like Arista, potential AI order slowdowns, and the need for clearer revenue disclosure to maintain confidence. Therefore, existing holders should consider trimming above $82, while new capital awaits a pullback to around $65 or evidence of stronger recurring revenue trends.

Thesis delta

The news confirms Cisco's AI momentum but does not change the DeepValue thesis of a 'POTENTIAL SELL' due to high valuation and integration risks. However, the 11% sell-off moves the stock closer to the attractive entry point of $65, improving risk-reward for patient investors if AI orders remain robust. Key shifts depend on future quarters showing consistent AI order conversion and RPO stabilization to challenge current skepticism.