$CSCO just posted record revenue, doubled its AI orders sequentially, and beat on both top and bottom line. The stock dropped 7%.
Welcome to being the boring AI winner.
What Happened
Cisco reported Q2 FY2026 on February 11 and the numbers were clean across the board. Revenue hit $15.3B, up 10% year-over-year, beating the $15.1B consensus. Non-GAAP EPS came in at $1.04, above the $1.02 estimate. Net income jumped 31% to $3.2B.
| Metric | Q2 FY2026 | YoY Change | vs. Estimate |
|---|---|---|---|
| Revenue | $15.3B | +10% | Beat |
| Non-GAAP EPS | $1.04 | +11% | Beat |
| Net Income (GAAP) | $3.2B | +31% | — |
| Networking Revenue | $8.3B | +21% | Beat |
| AI Infra Orders | $2.1B | +62% QoQ | — |
So why did it sell off? The Q3 guide came in just in-line: $1.02-$1.04 EPS on $15.4-$15.6B revenue. Not bad. Not exciting. And gross margin guidance of 65.5-66.5% spooked the crowd — down from 67.5% this quarter, because memory costs are spiking across the industry.
That's it. Record quarter. Stock down 7%. Classic Cisco.
The AI Story Nobody's Talking About
Here's the number that matters: $2.1 billion in AI infrastructure orders from hyperscalers in a single quarter. That's up from $1.3B last quarter. It matches Cisco's entire FY2025 AI order total — in one quarter.
Cisco now expects over $5B in AI orders and $3B+ in AI infrastructure revenue from hyperscalers for the full fiscal year. The mix is roughly 60% systems, 40% optics.
And it goes beyond the hyperscalers. Cisco booked $350M in AI orders from neocloud, sovereign, and enterprise customers, with a pipeline north of $2.5B. There's a JV with AMD and HUMAIN targeting up to 1 GW of AI infrastructure by 2030.
They shipped their one-millionth Silicon One chip. Launched the 102.4 Tbps G300 switch. Acacia — their optics unit — posted its strongest quarter ever with triple-digit bookings growth. The 800G pluggables are ramping.
This isn't a company dabbling in AI. This is the plumbing company for the $700B AI infrastructure buildout, and business is accelerating.
The Margin Problem (And Why It's Temporary)
The sell-off boils down to one thing: margins. Non-GAAP gross margin fell 120bps to 67.5%, and next quarter's guide implies another 100-200bps of compression.
The culprit is memory costs. GPU demand from Nvidia is sucking up memory supply, and that ripple effect hits every hardware maker — Cisco included. They bumped advance purchase commitments by $1.8B over the last 90 days to secure supply.
But here's what the panic misses: Cisco announced price increases, revised partner contracts, and is leveraging its scale for better supplier terms. CEO Chuck Robbins was clear on the call — these are timing effects, not structural changes.
Networking revenue grew 21%. Product orders accelerated across every region. The campus refresh cycle is adding fuel on top of AI. When you're growing the top line this fast, margin compression from an industry-wide cost spike is a speed bump, not a cliff.
Full-Year Picture
Cisco raised the bar for FY2026: $4.13-$4.17 adjusted EPS on $61.2-$61.7B in revenue, implying 8.5% full-year growth. Wall Street had $4.12 and $60.7B. Both numbers topped consensus.
The neocloud and sovereign pipeline — over $2.5B — hasn't meaningfully hit revenue yet. Robbins said the ramp starts in the back half of FY2026 and accelerates into FY2027. That's upside that isn't in the guide.
Bottom Line
Cisco is printing record revenue, doubling AI orders every quarter, and trading at roughly 16x forward earnings. For context, Arista trades at 40x+.
The market sold this off because margin guidance came in 100bps light. Meanwhile, the company is positioning itself as the backbone of every major AI data center buildout on the planet.
$CSCO isn't the flashy AI play. It's the picks-and-shovels play that actually has the earnings to back it up. At this valuation, the market is giving you the AI infrastructure leader at a legacy hardware multiple. That disconnect won't last.
CSCO