CSCO: Enterprise Networking And AI Demand Will Support Steady Upside Amid Sector Risks

Key Takeaways

• Accelerating AI infrastructure investment and integrated security within networking position Cisco to capture surging demand, supporting durable revenue and margin expansion.
  
• Growth in subscription-based and software offerings strengthens revenue predictability, boosts margins, and reinforces Cisco's transition to a high-visibility earnings model.
  
• Intensifying competition, evolving technology trends, and challenges in new revenue streams and acquisitions threaten Cisco's growth prospects, margins, and long-term financial stability.

Catalysts

Designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China.

• The rapid acceleration in AI infrastructure investment-highlighted by record AI infrastructure orders from webscale/cloud customers (doubling targets to $2B in FY25) and continued strength in order pipeline-positions Cisco to benefit from surging demand for high-performance, AI-optimized networking hardware, which is expected to drive both revenue and margin expansion as next-generation networks scale globally.
  
• Enterprises and governments are in a sustained cycle of digitizing operations, with Cisco seeing widespread adoption of refreshed networking (Cat9k, smart switches, ruggedized industrial IoT) and security products across industries; this digital transformation trend is expected to underpin steady order growth and recurring revenue acceleration, reinforcing both top-line and earnings visibility.
  
• Order growth and robust product mix in AI and security solutions, coupled with high momentum from cloud and telco segments, signal ongoing participation in the proliferation of cloud data centers and hyperscale deployments, which is poised to expand Cisco's addressable market and support durable, above-trend revenue growth.
  
• High adoption of subscription-based and software offerings-evidenced by recurring product revenue (ARR up 8%, subscription revenue at 54% of total)-indicates Cisco's successful shift to a higher-margin, more predictable revenue model, expected to improve net margin stability and support long-term earnings growth.
  
• Cisco's deep integration of security into networking, accelerated innovation in AI-driven solutions (AgenticOps, AI Canvas), and strategic partnerships (NVIDIA, AMD) create a competitive moat as customers face rising cyber threats, laying the foundation for continued expansion in security revenues, pricing power, and net margin improvements.

Cisco Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cisco Systems's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.0% today to 21.4% in 3 years time.
• Analysts expect earnings to reach $14.0 billion (and earnings per share of $3.45) by about September 2028, up from $10.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from 26.2x today. This future PE is lower than the current PE for the US Communications industry at 27.2x.
• Analysts expect the number of shares outstanding to decline by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

Cisco Systems Future Earnings Per Share Growth

Risks

• Accelerating shift to cloud-based networking and increasing dominance of hyperscale cloud providers, who are internalizing more networking equipment, could reduce Cisco's addressable market and undermine long-term hardware and software revenue growth.
  
• Growing competition from low-cost Asian manufacturers and disruptive startups, as well as increasing adoption of open-source and software-defined networking (SDN) solutions, may lead to price pressure and margin compression, ultimately impacting net margins and earnings.
  
• Execution risk exists in successfully transitioning to recurring revenue models and driving growth in new software and security offerings; current security and services revenue growth is lagging company targets, which could constrain medium
• to long-term earnings and margin expansion.
  
• Cisco's heavy reliance on large AI infrastructure orders from a relatively small set of hyperscale and webscale customers introduces cyclicality and risk of order volatility; a slowdown in cloud or AI spending could lead to revenue growth deceleration.
  
• Ongoing integration challenges from large acquisitions (e.g., Splunk) and the complexity of adapting legacy product lines to new AI, cloud, and security demands may result in operational inefficiency and increased costs, negatively impacting overall profitability and financial stability.

Valuation

• The analysts have a consensus price target of $75.815 for Cisco Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $87.0, and the most bearish reporting a price target of just $61.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $65.2 billion, earnings will come to $14.0 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 8.4%.
• Given the current share price of $67.34, the analyst price target of $75.81 is 11.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.