Cisco (CSCO) Looked Like an Old Tech Stock. AI Is Changing the Story

Cisco Systems (CSCO) shares have rallied sharply following the company’s latest earnings report, but I still view the stock as a Buy. Cisco’s Fiscal Q3 provided evidence that its artificial intelligence (AI) infrastructure story is now translating into actual orders, higher guidance, and greater growth visibility. The recent move appears to be more than just a short-term reaction to a strong quarter.

Cisco’s valuation is no longer as cheap as it was when the company was viewed purely as a mature networking business, and that may be the main risk to consider right now. However, on the other hand, hyperscaler AI infrastructure demand has accelerated significantly; Silicon One and Acacia Optics are gaining traction, and margins are showing signs of stabilization.

Because of this, I believe the global leader in networking and cybersecurity solutions deserves a higher valuation than its historical average. Moreover, even after the post-earnings re-rating, the stock may still have room to move higher. For that reason, I remain bullish on CSCO stock.

Cisco’s Role in the AI Infrastructure Cycle

Taking a step back, I believe it is important to understand Cisco’s role within the AI infrastructure supercycle. In any AI cluster, graphics processing units (GPUs) perform the computations, but someone still needs to move massive volumes of data between servers with minimal latency and extremely high reliability. That is exactly where Cisco comes in.

Today, Cisco’s two main AI growth drivers are Silicon One, its family of proprietary networking chips, and Acacia Communications, its optics business. Acacia plays a critical role in connecting racks and clusters at extremely high speeds by converting electrical signals into optical signals for transmission over fiber. To put Cisco’s importance in perspective, management recently stated that approximately half of its hyperscale AI revenue is tied to systems powered by Silicon One. Meanwhile, advanced optical components typically carry high margins and strong pricing power.

Q3 Proved the AI Thesis Is Real

To start with, Cisco delivered the classic formula in Q3 2026 that sends any stock soaring: a beat across the board, followed by guidance that was raised well above expectations.

On both the top and bottom lines, Cisco reported $15.8 billion in revenue, up 12% year-over-year, and non-GAAP earnings per share (EPS) of $1.06, beating consensus by roughly 2% and coming in above the high end of management’s own guidance.

However, the most important takeaway was the 35% year-over-year growth in product orders. AI infrastructure orders from hyperscalers reached $1.9 billion in Q3 and $5.3 billion year-to-date. As a result, Cisco nearly doubled its FY26 AI infrastructure order forecast to approximately $9 billion, up from its previous outlook of more than $5 billion.

That is arguably the biggest difference compared to Cisco’s pre-Q3 thesis. Previously, the bull case depended on its Silicon One, optics, and AI networking translating into measurable financial results. Now, it appears that this is already showing up clearly in both the numbers and the outlook. Management also expects to recognize approximately $4 billion in AI infrastructure revenue in FY26, more than double the annualized pace implied by Q3 results.

The Margin Story Is Stabilizing

There was also a meaningful concern about margins heading into Q3. The explosive demand for memory sent prices soaring, which had recently put pressure on Cisco’s cost structure, to the point that in Q3, Cisco reported a gross margin of 66%, down 260 basis points year-over-year.

However, management made it clear that they believe margins have stabilized, guiding Q4 to a midpoint of the same 66% reported in the most recent quarter. As a result, the perception that AI-driven growth continues to accelerate while margins may have found a balance point bodes quite well for the investment thesis.

Valuation Looks Expensive, but the Story Has Changed

The most sensitive part of the thesis, perhaps, concerns valuation. Cisco does not look cheap by any means, even if the recent results suggest the stock deserves a re-rating. The stock currently trades at around 27x forward earnings, roughly 10% above the communications equipment industry average of about 24.5x and more than 77% above its own five-year historical average.

That said, I believe it is important to acknowledge that Cisco’s role in the AI infrastructure cycle arguably puts the company in a different category. Over the past five years, diluted EPS has grown at a CAGR of just 4.4%. By contrast, consensus expects earnings to grow at a low double-digit rate in each of the next three fiscal years. If that proves to be the case, today’s valuation may start to look less like an aggressive premium and more like a new floor for the stock.

For example, if we assume Cisco ultimately trades at 30x forward earnings and grows EPS by 12.3%, in line with current FY26 consensus expectations, the resulting PEG ratio would be approximately 2.5. That is certainly not a bargain. Still, it does not look excessive for a company with highly predictable cash generation, a dividend yield of roughly 2%, and meaningful exposure to long-term AI infrastructure tailwinds.

Is CSCO a Buy, Hold, or Sell, According to Wall Street Analysts?

The consensus view on Cisco stock is a Moderate Buy. Among the 17 analyst ratings issued over the past three months, 11 are Buy and six are Hold. The average price target now stands at $124.54, following several target increases after Q3 earnings, implying approximately 5.8% upside from current levels.

A Buy Despite the Premium

I view Cisco as a Buy for now, even though its valuation may appear demanding at first glance. The recent re-rating was well deserved. Cisco delivered strong results, beat expectations across the board, and raised guidance meaningfully after reporting exceptionally strong demand for AI infrastructure from hyperscalers. Margins also held up better than many investors expected, and I believe there could be more quarters like this in the foreseeable future.

Given the predictability of Cisco’s business as a mature networking company, combined with the optionality created by AI infrastructure tailwinds, today’s valuation may not be as stretched as it initially appears. In fact, I believe a multiple of around 30x forward earnings could represent a new floor for a quality-and-growth story like Cisco. Viewed through that lens, the stock still looks reasonably attractive to me.