Cisco shares fell 8.4% after earnings: investors were disappointed by margins and the AI business growth outlook

Cisco Systems (CSCO) shares fell 8.4% on the Nasdaq on August 13, despite stronger-than-expected results for the fourth quarter of fiscal 2026. Investors were concerned about a decline in gross profitability and cautious guidance for the new fiscal year. Freedom analyst Natalia Milchakova believes pressure on the stock may persist due to Cisco’s business mix: traditional segments still account for a significant share, while the fast-growing data center and artificial intelligence equipment business has not yet become a dominant source of revenue. 

Cisco beat revenue and profit forecasts

Cisco’s financial results themselves were strong. Revenue in the fourth quarter rose 17.6% year over year to $17.25 billion, above the consensus estimate of $16.82 billion. Adjusted earnings were $1.22 per share versus the $1.17 the market had expected. 

Cisco Systems (CSCO) is a U.S. technology company and one of the world’s largest manufacturers of **network equipment and software. Cisco produces routers, switches, and other equipment for enterprise networks and data centers, and also develops solutions in cybersecurity, cloud technologies, and enterprise communications. In recent years, the company has been actively developing infrastructure for artificial intelligence, including network equipment and technologies for AI data centers. 

One of the main drivers remains the buildout of infrastructure for artificial intelligence. In the fourth quarter, Cisco received $4 billion in AI infrastructure orders from the largest cloud platform operators, and $9.3 billion for the full fiscal year. The company’s networking revenue for the quarter reached $9.79 billion, up 28% year over year. 

Why Cisco shares fell 8.4% after a strong report

The main cause for concern was profitability. Cisco’s adjusted gross margin fell from 68.4% a year earlier to 66.3%. For the first quarter of the new fiscal year, the company forecasts the metric in the 65–66% range, while the market had expected around 66.1%. Margin pressure is being driven by a higher share of hardware in the sales mix and rising component costs for AI infrastructure. 

The market reaction was amplified by high expectations that had built up ahead of the report. Since the start of 2026, Cisco shares have risen more than 60%, so investors were not satisfied with merely confirming the already-expected growth of the AI segment — the market needed further acceleration. After the results were released, the stock initially gained about 3% in after-hours trading, but then reversed and moved lower. By the end of trading on August 13, the decline reached 8.4%.

Cisco’s AI business is growing, but competition remains high

For fiscal 2027, Cisco forecasts revenue of $72.2–73.4 billion, above the consensus estimate of $68.69 billion. From artificial intelligence infrastructure solutions supplied to the largest cloud companies, Cisco expects to generate about $7.5 billion in revenue. 

However, Freedom analyst Natalia Milchakova points to an imbalance within the company’s business. Cisco is actively ramping up sales of networking equipment for data centers and AI infrastructure, but traditional products and services still retain significant weight in the business mix. As a result, rapid growth in the new segment does not yet deliver a comparable improvement in profitability for the company as a whole.

An additional risk remains intense competition for the largest AI infrastructure customers. Cisco has to both increase equipment shipments and compete for new projects at the same time, which limits its ability to raise prices and expand margins. According to the Freedom analyst, until the AI segment becomes a more meaningful and profitable part of the business, the cooling of investor interest in Cisco shares may continue.

Cisco’s revenue and AI infrastructure orders continue to grow

The current investor reaction contrasts with Cisco Systems (CSCO)’s financial results. In the fourth reported quarter, the company increased revenue from $14.67 billion to $17.25 billion, and net income from $2.55 billion to $3.86 billion. Adjusted earnings were $1.22 per share versus the market forecast of $1.17. For fiscal 2027, Cisco expects revenue of $72.2–73.4 billion, while the consensus stood at $68.69 billion. By the time the earnings were released, the stock had already gained more than 56% since the start of 2026 on expectations of AI-related business growth. More details — in the article «Cisco Systems results beat forecasts». 

High expectations for the AI segment had been forming since the previous quarter. In May, Cisco reported its third fiscal quarter results: revenue rose 11.9% year over year to $15.84 billion, beating the forecast of $15.56 billion, and adjusted earnings were $1.06 per share versus the expected $1.04. The company also said it received $5.3 billion in orders for artificial intelligence infrastructure and solutions for the largest cloud operators, and raised its full-year forecast for such orders from $5 billion to $9 billion. Expected revenue in this market was increased from $3 billion to $4 billion. 

Thus, investor disappointment after the latest report is not due to a lack of growth in Cisco’s business. The company continues to increase revenue and develop its AI infrastructure segment; however, after a strong run-up in the stock and upward revisions to forecasts in previous quarters, market expectations have also risen significantly. Against this backdrop, investors have begun to assess more closely not only the AI business growth rate, but also its ability to offset pressure on the company’s profitability.

Not an individual investment recommendation.