Cisco (CSCO) stock dropped nearly 8% in pre-market trading, despite reporting better-than-expected quarterly results.
The networking giant beat both earnings and revenue estimates for its fiscal second quarter, but investors were disappointed by guidance that only met expectations for the current period, News.Az reports, citing foreign media.
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The company posted adjusted earnings of $1.04 per share on revenue of $15.35 billion, topping analyst estimates of $1.02 per share and $15.12 billion in revenue.
Revenue grew 10% year-over-year, while net income jumped to $3.18 billion from $2.43 billion in the same quarter last year.
However, Cisco stock dropped about 8% when management issued guidance for the fiscal third quarter. The company expects adjusted earnings per share of $1.02 to $1.04 and revenue of $15.4 billion to $15.6 billion. Analysts were looking for $1.03 per share and $15.18 billion in revenue.
The bigger concern appears to be around gross margin pressure. CFO Mark Patterson warned that third-quarter gross margins would decline to 65.5% to 66.5%, down from 67.5% in the second quarter.
This decline is driven by two factors: product mix and rising memory costs, which are affecting the entire technology industry.
On the positive side, Cisco is seeing real momentum in AI infrastructure.
The company reported $2.1 billion in AI orders from hyperscale customers during the quarter, up from $1.3 billion last quarter.
For the full fiscal year, Cisco now expects AI infrastructure orders to exceed $5 billion and revenue to top $3 billion.
CEO Chuck Robbins emphasized that Cisco’s networking revenue grew 21% year-over-year to $8.3 billion, beating analyst estimates of $7.9 billion. This growth was driven by strong demand for campus networking equipment, data center switches, and AI infrastructure products.
What the Market Is Telling Us About Cisco StockThe market’s negative reaction to Cisco stock suggests investors are more concerned about near-term margin pressure than the company’s solid revenue growth and AI momentum.
While Cisco beat estimates and raised its AI revenue outlook, its gross margin guidance indicates profitability headwinds that could persist through the second half of fiscal 2026.
Rising memory costs are squeezing margins across the tech industry, and Cisco is not immune. The company has announced price increases and is renegotiating contracts with channel partners, but these measures will take time to translate into the bottom line.
Patterson noted that Cisco’s strong supply chain and financial position should help it manage this challenge better than competitors, but investors appear skeptical about how quickly margins can recover.
That said, Cisco stock still looks reasonably positioned for long-term investors.
The company is gaining traction in AI infrastructure with hyperscalers, its core networking business is growing at 21%, and the campus refresh cycle is just beginning.
The key question is whether the margin pressure is temporary or signals a longer-term profitability challenge as Cisco shifts toward higher-volume AI infrastructure sales.
