Cisco Systems (CSCO -8.40%) delivered about as strong a close to fiscal 2026 as investors could have asked for. Fourth-quarter revenue rose 18% year over year to a record $17.3 billion, and full-year revenue climbed 12% to a record $63.3 billion. Management also guided fiscal 2027 revenue to grow about 15% at the midpoint -- a second straight year of accelerating growth for a company that grew 5% in fiscal 2025.
CEO Chuck Robbins put a name on what's driving it. "We believe the accelerating adoption of agentic AI is fueling a Networking Supercycle," he said on Wednesday's fiscal fourth-quarter earnings call.
And yet shares fell 8.4% Thursday, closing at about $113.
The sell-off has little to do with growth. It's about what the growth costs, and to me the place to see it is Cisco's gross margin.
Image source: The Motley Fool.
The supercycle now has a number
For the past two years, Cisco's artificial intelligence (AI) story lived mostly in its order book.
In fiscal 2026, the company took $9.3 billion of AI infrastructure orders from hyperscalers (the giant cloud companies building AI data centers), including $4 billion in the fourth quarter alone. Orders from customers beyond the hyperscalers (smaller AI-focused clouds, governments, and enterprises) topped $1 billion for the year. And the demand reaches well past AI. Total product orders rose 35% year over year in the fourth quarter, while networking product orders grew 40%, the eighth straight quarter of double-digit growth for that portfolio.
Now the orders are showing up in revenue. AI infrastructure for hyperscalers produced about 6% of Cisco's total revenue in fiscal 2026, up from less than 2% in fiscal 2025. Management expects that revenue to reach $7.5 billion in fiscal 2027, roughly a tenth of the $72.2 billion to $73.4 billion it guided for.
Put another way, in two years the business will have gone from a sliver of Cisco's revenue to about a tenth of it, if the guide holds.
The margin bill
That revenue arrives with a different profit profile than the one Cisco investors are used to. Non-GAAP (adjusted) gross margin came in at 66.3% in the fourth quarter, down 210 basis points year over year. Product gross margin fell 270 basis points to 64.8%. Management attributed the drop primarily to a higher hardware mix and memory costs.
However, the pressure isn't guided to ease. For the fiscal first quarter, Cisco expects gross margin of 65% to 66%, below what it just reported and likely a preview of the mix ahead.
The reason is the hardware itself. Hyperscaler AI infrastructure is physical equipment (the orders behind it ran roughly 60% Silicon One-based systems and 40% optics in fiscal 2026, per management), and equipment carries lower margins than the software Cisco sells. Software revenue was $6.2 billion in the fourth quarter, up 11% -- growing far slower than the hardware wave around it.
The bottom line is absorbing the pressure so far. Non-GAAP earnings per share rose 23% in the fourth quarter to $1.22 and 14% for the full year to $4.33. Management guided fiscal 2027 earnings per share of $5.05 to $5.11, up about 17% at the midpoint -- faster than revenue. The offset is coming from operating costs: Full-year non-GAAP operating margin expanded 40 basis points to 34.8%.
NASDAQ: CSCO
Key Data Points
What the sell-off changes
So, is the $7.5 billion a business or a label? Cisco booked $9.3 billion of hyperscaler orders in fiscal 2026 and won three new hyperscaler design wins in the fourth quarter. AI infrastructure's share of revenue has gone from less than 2% to about 6%, with about 10% guided next.
That looks like a business to me. But it's arguably a lower-quality one, dollar for dollar, than the software that drives much of Cisco's profitability.
At about $113, the stock trades at about 22 times the midpoint of the new earnings guidance, down from about 24 times on Wednesday's close. The dividend, at $1.68 per share annually, yields about 1.5%. Cisco also returned $12.7 billion to shareholders in fiscal 2026 through dividends and buybacks, and it raised the dividend for the 15th consecutive year.
I don't think Thursday's sell-off contradicts the supercycle. Cisco is growing faster than it has in years, and earnings are guided to grow faster than revenue even with the margin pressure. But gross margin could keep drifting lower as the hardware mix grows, and at about 22 times forward earnings, shares still assume the erosion stays modest.
