To The Moon

$Cisco(CSCO)$ shares rose 2% Monday (16 June) after Deutsche Bank upgraded the stock to Buy, citing improved growth visibility and favorable competitive dynamics. Cisco's valuation remains attractive, with potential for enhanced revenue and earnings growth. But we saw Cisco retreated slightly with a 0.27% decline.

Cisco Systems (CSCO) is strategically transforming its business, moving beyond its traditional networking stronghold to become a dominant player in high-growth technology sectors such as AI infrastructure and cybersecurity. This evolution is clearly supported by strong financial performance and a well-defined vision for sustained growth in the era of artificial intelligence.

Strong Financial Performance and Growth Momentum

Cisco's recent financial results underscore its strategic success. In the third quarter of fiscal year 2025 (ending April 26, 2025), the company reported robust total revenue of $14.1 billion, an impressive 11% increase year-over-year, surpassing its own guidance. Profitability also saw significant gains, with Generally Accepted Accounting Principles (GAAP) Net Income rising 32% year-over-year to $2.5 billion, and GAAP Diluted Earnings per Share (EPS) climbing 35% to $0.62. On a non-GAAP basis, Net Income increased 8% to $3.8 billion, and non-GAAP EPS was up 9% to $0.96.

A key indicator of future growth is the 20% year-over-year growth in total product orders. Even excluding the impact of the transformative Splunk acquisition, product orders still saw a healthy 9% year-over-year increase, demonstrating broad-based demand across all geographies and customer markets. A significant achievement was the accelerated growth in AI infrastructure orders from webscale customers, which exceeded $600 million in Q3 FY25 alone. This pushed year-to-date AI orders beyond $1 billion, achieving Cisco's annual target a full quarter ahead of schedule.

For the upcoming fourth quarter of fiscal year 2025, Cisco projects revenue between $14.5 billion and $14.7 billion, and non-GAAP EPS between $0.96 and $0.98. The full-year FY25 guidance anticipates total revenue of $56.5 billion to $56.7 billion and non-GAAP EPS of $3.77 to $3.79, implying a projected 5.18% year-over-year revenue growth for fiscal year 2025. Product revenue was a primary driver of growth in Q3 FY25, increasing 15% year-over-year and accounting for over 73% of total revenues. Growth was particularly strong in Security (up 54% year-over-year), Observability (up 24%), Networking (up 8%), and Collaboration (up 4%). Cisco also maintained a robust non-GAAP operating margin of 34.5% in Q3 FY25 and achieved its highest non-GAAP gross margin in 20 years (67.5% in FY24), signaling efficient cost management and strong financial health.

Strategic Shift Towards Software and Recurring Revenue

Cisco's strategic emphasis on software and recurring revenue is clearly reflected in its financial metrics, fundamentally reshaping its business model. In fiscal year 2024, total subscription revenue, including the Splunk acquisition, reached $27.4 billion, representing a significant 51% of Cisco's total revenue. Total Annualized Recurring Revenue (ARR) stood at $29.6 billion, including $4.3 billion from Splunk, demonstrating a robust 22% year-over-year increase. Total software revenue for FY24 was $18.4 billion, up 9% year-over-year, with software subscription revenue accounting for $16.4 billion (up 15% year-over-year) and representing 89% of total software revenue. Remaining Performance Obligations (RPO), a key indicator of future contracted revenue, increased 7% year-over-year to $41.7 billion in Q3 FY25, with 51% expected to be recognized as revenue over the next 12 months, providing strong revenue visibility and predictability.

This strategic pivot significantly enhances Cisco's financial resilience and growth visibility. Recurring revenue streams are inherently more stable and predictable than one-time hardware sales, providing a stronger foundation for future earnings forecasts and reducing vulnerability to economic fluctuations or hardware refresh cycles. For investors, this de-risks Cisco's investment profile, making its future cash flows and earnings more reliable, which can justify a higher valuation multiple and contribute to sustained positive investor sentiment.

Robust Capital Allocation Strategy

Cisco consistently demonstrates a strong commitment to returning value to shareholders. In Q3 FY25, the company returned $3.1 billion to stockholders through a combination of share buybacks and dividends. A quarterly cash dividend of $0.41 per common share was declared, annualizing to approximately a 2.7% yield. Cisco repurchased approximately 25 million shares of common stock for $1.5 billion in Q3 FY25, and still has a substantial $15 billion remaining under its current stock repurchase authorization.

This aggressive capital allocation strategy, even while investing heavily in strategic growth areas like AI and acquisitions, demonstrates a commitment to delivering tangible value to shareholders. It helps attract a broader base of investors and provides fundamental support for the stock price. Share buybacks also reduce the outstanding share count, which can organically boost EPS over time. The consistent emphasis on AI infrastructure orders from webscale customers exceeding targets ahead of schedule is a quantifiable financial achievement, further validating Cisco's strategic investments in AI as a tangible, near-term growth driver.

Strategic Pillars Driving Future Growth

A. Leadership in AI Infrastructure: Cisco is experiencing significant momentum in its AI infrastructure business. In Q3 FY25, AI infrastructure orders from webscale customers alone exceeded $600 million, contributing to a year-to-date total of over $1 billion in AI orders, achieved a full quarter ahead of the company's annual target. This robust demand was largely driven by triple-digit growth from three of the top six webscalers, with the majority of these orders concentrated in high-value systems and optics components. This indicates that Cisco is capturing a substantial share of the foundational infrastructure build-out for large-scale AI deployments.

The company is actively innovating to provide the necessary infrastructure for the burgeoning AI landscape. Key advancements include the introduction of N9300 Smart Switches with Hypershield, embedding security and services directly into the network fabric, and expanding its AI server portfolio with offerings like the UCS C845A M8 server, based on NVIDIA's MGX reference architecture. Cisco is also developing new configurable AI PODs for flexibility and scalability for diverse AI workloads, and new 400G bidirectional (BiDi) optics are slated for release in the second half of calendar year 2025. The upcoming Unified Nexus Dashboard, set for release in July 2025, will consolidate management across various network fabrics. Cisco's AI strategy is bolstered by critical partnerships, notably with $NVIDIA(NVDA)$, leveraging its dominance in GPU technology and AI computing, and a strategic alliance with G42. Strategic investments in cutting-edge AI startups like Anthropic and Cohere further integrate Cisco into the broader AI ecosystem. By providing high-bandwidth, low-latency, and secure networking infrastructure, Cisco embeds itself deeply into the future growth of virtually every AI-driven industry, creating a powerful and durable competitive advantage.

B. Enhanced Cybersecurity Portfolio: The acquisition of Splunk for $28 billion is a cornerstone of Cisco's long-term strategic vision, aiming to significantly enhance its cybersecurity, observability, and data analytics capabilities. This merger positions Cisco as a formidable player in the observability market and enables it to offer end-to-end security solutions by integrating Splunk's Security Information and Event Management (SIEM) with Cisco's Extended Detection and Response (XDR) capabilities. The integration is projected to be cash flow positive in fiscal year 2025 and is expected to enhance non-GAAP EPS by fiscal year 2026. Cisco anticipates substantial cross-selling opportunities, targeting over 5,000 existing Cisco customers who could benefit from Splunk's offerings.

Cisco is aggressively "fusing security capabilities deeper into its networking infrastructure." This includes new capabilities for its Hybrid Mesh Firewall, integrating advanced firewall features directly with N9300 Smart Switches, allowing the security architecture to adapt to AI workload traffic patterns. Cisco is also extending its Universal Zero Trust Network Access (ZTNA) with Hybrid Private Access. New features like Cisco Live Protect enable live patching of vulnerabilities without system downtime.

The Secure Firewall 200 series is touted for its superior price-performance, offering a 3x price-performance guarantee compared to competitors. The rapid proliferation of AI tools has led to a surge in AI-related cybersecurity incidents. Despite this, Cisco's 2025 Cybersecurity Readiness Index reveals that only 7% of companies have achieved a "Mature" stage in "AI Fortification," highlighting a significant market gap and an urgent need for advanced security solutions.

Cisco aims to empower IT and security teams to combat AI-enhanced attacks by reimagining network security, protecting AI applications and models, and equipping security professionals with AI-driven tools. Cybersecurity is not merely a product line for Cisco but a fundamental growth multiplier and a powerful lever in its competitive dynamics.

C. Evolution in Collaboration Solutions: Cisco is continually evolving its collaboration portfolio, particularly Webex, to meet the demands of modern hybrid work environments. In 2025, Cisco launched a new version of Webex that integrates advanced video conferencing capabilities with augmented reality (AR) features, leading to a notable 15% increase in Webex usage among enterprise clients. Complementary hardware announcements, such as the Room Vision Pan, Tilt, $Zoom(ZM)$ (PTZ) camera and enhanced ceiling microphones, are designed to create an intelligent and seamless communication infrastructure for remote and hybrid teams.

A significant strategic initiative for Cisco is the introduction of its AgenticOps model, which aims to deploy autonomous AI agents that collaborate with human operators to execute real tasks across various domains. This system is powered by Cisco's purpose-built Deep Network Model, a domain-specific large language model (LLM) trained on over 40 years of networking expertise. Cisco's own research predicts a transformative impact on customer experience, with agentic AI expected to handle 68% of all customer service and support interactions with technology vendors by 2028. These AI-driven interactions are anticipated to enable more personalized, proactive, and predictive services and drive substantial improvements in IT productivity, time savings, and cost savings.

Competitive Dynamics and Market Positioning

Cisco Systems maintains a commanding position in the enterprise networking market, holding a dominant market share of 76.22% as of Q1 2025, despite competition from Arista Networks, $Juniper Networks(JNPR)$, and others. The broader enterprise networking market is experiencing robust growth, projected to expand to USD 175.2 billion by 2029, fueled by cloud services, AI/ML, and network virtualization. Cisco's networking revenue itself rose 8% year-over-year in Q3 FY25, driven by growth in switching, enterprise routing, and industrial IoT.

In cybersecurity, the global IT & telecom cybersecurity market is projected to grow at a significant CAGR of 14.2% from 2025 to 2030. While Cisco is a top player, it faces rivals like Palo Alto Networks, Fortinet, CrowdStrike, and major cloud providers. Cisco positions itself uniquely as the "only secure networking company," emphasizing a holistic approach to security built on "security-infused networking, programmable silicon, and Splunk-fueled telemetry processing."

In the Enterprise Collaboration Market, Cisco holds an 18% market share, trailing Microsoft. Its strategy centers on continuous innovation and leveraging AI to enhance user experience, as seen with Webex's new AR features and the AgenticOps model. A crucial competitive dynamic for Cisco is the recognition that "network bandwidth, not GPU scarcity, will become the gating factor" for AI workloads. Cisco is actively scaling port speeds and emphasizing "high-bandwidth, low latency and power efficient networking for data centers," positioning itself as an indispensable partner for organizations scaling their AI ambitions.

Broader AI Landscape and Regulatory Considerations

The AI industry is undergoing profound transformation, with multimodal AI emerging as a breakthrough and the market projected for explosive growth. Corporate adoption of AI is accelerating, with 78% of organizations reporting AI usage in at least one business function in 2024. This surge is fueled by record private investment, reaching $109.1 billion in the U.S. in 2024. Ethical challenges like algorithmic bias, privacy, and accountability are critical, leading to a rapidly evolving global regulatory landscape.

The EU AI Act, finalized in August 2024, establishes a comprehensive legal framework for AI, while the U.S. focuses on voluntary guidelines and state-level legislation. This evolving regulatory environment, while presenting compliance challenges, also acts as a powerful competitive filter. Companies that can demonstrate strong ethical AI governance, transparency, and bias mitigation will gain a significant advantage. Cisco, through its "Trustworthy AI" initiatives and "Human-in-the-Loop" oversight for its Agentic AI solutions, is proactively aligning with these principles, building trust and potentially capturing market share. The accelerating pace of AI development reinforces the criticality of Cisco's focus on "AI-ready data centers" and flexible network infrastructure.

Investor Sentiment and Future Outlook

Analyst sentiment towards Cisco is largely positive, with a "Buy" consensus rating (based on 53 analyst ratings) and an average 12-month price target of $68.53, suggesting approximately 15% potential upside. Cisco's long-term strategic vision is centered on transforming into an "AI-native orchestrator that fuses security, telemetry, and silicon." Key long-term growth drivers include AI infrastructure dominance, integrated security leadership (post-Splunk), accelerated software and subscription growth, Agentic AI for operational efficiency and customer experience, and strategic partnerships.

Cisco's trajectory indicates a clear path to improved growth visibility and favorable competitive dynamics. Its proactive pivot towards AI infrastructure and integrated security, underpinned by a strategic shift to a recurring revenue model, provides a more predictable and resilient financial profile. The quantifiable success in AI infrastructure orders, coupled with the transformative Splunk acquisition, demonstrates tangible revenue acceleration and market capture in high-growth areas. Cisco's "platformization" strategy, which unifies networking, security, and observability, offers a compelling value proposition to enterprises. Its recognition of network performance as a critical enabler for AI adoption positions it uniquely to capitalize on massive data flows and low-latency requirements. The company's commitment to ethical AI development and its strong capital allocation strategy further reinforce investor confidence, positioning Cisco favorably for sustained growth and market leadership in the evolving AI era.

Technical Analysis - Long Term Monthly Time-frame - Bulls Are In Control

As we have seen largely a BUY sentiment from analysts, if we looked at the longer timeframe like monthly, we are seeing that the bulls have been in control and have created a new high, with further uptrend continuation happening.

Cisco have been enjoying the strong positive momentum though we saw that there are some price correction, which still allows Cisco to stay around the 26-EMA and 50-EMA level.

Hence, I think there would be more opportunities in coming months as the AI is moving towards consolidation and key players would start to be identified for the different technology stack.

Summary

Cisco Systems is successfully navigating a pivotal transformation, aligning its core competencies with the burgeoning demands of the AI era. Its recent financial performance and strategic initiatives, particularly in AI infrastructure and cybersecurity, provide tangible evidence of its operational effectiveness. The shift to a software- and subscription-led business model, bolstered by the Splunk acquisition, is creating predictable revenue streams.

Cisco's integrated platform approach, combined with its focus on secure, intelligent infrastructure and responsible AI development, positions it as a reliable partner for organizations embarking on their AI journeys. This strategic clarity, strong execution, and favorable analyst sentiment collectively strengthen investor confidence for the foreseeable future.

I think Cisco can be considered to be placed for the long term strategy as Cisco have shown that it is able to maintain the market leadership in the AI infrastructure especially in the networking segment.

Appreciate if you could share your thoughts in the comment section whether you think Cisco would continue to benefit from the demand from AI, as more and more companies and projects would require the networking part of the entire infrastructure stack.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.