What happened
Shares of Cisco Systems (CSCO -1.67%) were up 4% as of 11:07 a.m. ET on Thursday after an upbeat second-quarter earnings report.
Revenue and earnings beat Wall Street estimates, and management had some positive comments about the direction of near-term business trends that lifted investor confidence in the networking leader.
So what
Cisco said revenue increased by 16% year over year, with adjusted earnings per share up 37%. Results were boosted by Cisco's ongoing transformation to a more software-oriented business. Software revenue surged 17%, while subscription revenue grew 20% over the year-ago quarter.
Cisco is already dominant in enterprise network infrastructure, with 41% share of the market. Management said it gained 3 percentage points of share from last year in its top networking markets: campus switching and wireless routing. Management expects further share gains in the near term.
Overall, business trends appear to be very healthy. Cisco reported a 30% sequential increase in product orders. With double-digit growth, innovation, and expectation for further share gains, it's no surprise the stock is surging to new highs.
Now what
The market also had to like management's comments on the earnings call about the potential for new solutions for artificial intelligence (AI) to drive more demand. Cisco has been investing in AI for a while and is "laser focused," as CEO Charles Robbins mentioned, in delivering growth from this opportunity. AI workloads in data centers will require faster and greater network bandwidths, which could play to Cisco's benefit over the long term.
The stock remains attractively valued at a relatively low forward price-to-earnings (P/E) ratio of 13.6, which is less than the tech sector average P/E of over 20. Cisco is highly profitable, with a large customer base, and these qualities should lead to more returns for shareholders.
