Cisco (CSCO) Returns to Revenue Growth: A Resilient Tech Giant Positioned for AI-Driven Expansion

Jay's InsightThursday, Feb 13, 2025 10:46 pm ET
3min read

Cisco Systems (NASDAQ: CSCO) delivered an impressive fiscal Q2 2024 report, marking a return to revenue growth after four consecutive quarters of year-over-year declines. The company’s performance exceeded expectations, with EPS surpassing estimates and revenue climbing 9.4% to $13.99 billion.

While these results are strong on their own, Cisco's order growth momentum, strategic positioning in AI infrastructure, and continued strength in enterprise and cloud networking suggest the company is regaining its footing in a competitive tech landscape. However, with the stock already up 35% since mid-August, the muted market reaction suggests that much of this optimism was already priced in.

Key Takeaways from Cisco’s Q2 Performance

- Revenue Growth Resumes: $13.99 billion in Q2 revenue, up 9.4% year-over-year

- Strong Order Growth: Fourth consecutive quarter of accelerating new product orders, up 29% overall, 11% organically (excluding Splunk)

- Enterprise Demand Expands: Enterprise product orders grew 27%, with double-digit growth across all geographic regions

- AI Infrastructure Orders Gain Momentum: Surpassed $350 million in Q2, bringing YTD AI orders to $700 million; on track to exceed $1 billion in FY25

- Service Provider & Cloud Strength: Orders surged 75%, fueled by triple-digit growth in webscale orders

- Network Product Growth: Double-digit increases in switching, routing, webscale infrastructure, and industrial IoT networking

- Capital Returns: Cisco increased its dividend slightly and added $15 billion to its share buyback authorization

These numbers indicate broad-based strength, particularly in enterprise networking, cloud services, and AI-driven infrastructure demand. However, with in-line EPS guidance for Q3, Cisco may need to demonstrate continued execution in AI and cloud networking to sustain its momentum.

AI Infrastructure: A Multi-Billion Dollar Growth Opportunity

One of the most exciting takeaways from Cisco’s earnings report is the rapid expansion of AI infrastructure orders. In Q2 alone, AI-related orders surpassed $350 million, with YTD figures reaching $700 million. Cisco now expects AI-related orders to exceed $1 billion in FY25, reflecting its increasing relevance in the rapidly growing AI-powered networking market.

This is particularly significant because three of the top six webscale customers increased their orders by triple digits, highlighting Cisco’s growing role in the AI data center buildout.

As enterprises and cloud providers scale their AI-driven workloads, demand for high-speed networking, data center switching, and AI-optimized infrastructure will only increase. Cisco is positioning itself as a key beneficiary of this trend, competing with Arista Networks (ANET), NVIDIA (NVDA), and Juniper Networks (JNPR) in high-performance networking.

Service Provider & Cloud Growth: A Strong Indicator of Market Expansion

Cisco’s Service Provider & Cloud business delivered 75% growth in orders, driven by:

- Triple-digit growth in webscale orders (large cloud and internet providers)

- 20%+ growth from telecom customers, as they reinvest in core networks to support AI-driven workloads

This signals that cloud and telecom providers are aggressively expanding their infrastructure, a positive sign for long-term networking demand. Cisco’s high-performance networking solutions are increasingly critical as hyperscalers (such as Amazon Web Services, Microsoft Azure, and Google Cloud) scale AI workloads and improve connectivity.

Networking & IoT Growth: Key to Future Expansion

Cisco’s networking division remains a core strength, with double-digit order growth in:

- Switching (campus and data center)

- Enterprise routing

- Webscale infrastructure

- Industrial networking and IoT solutions

These areas will continue to benefit from:

- Return-to-office policies, which are driving demand for campus networking upgrades

- 5G rollouts and private 5G adoption, fueling new enterprise and industrial IoT deployments

- AI-driven cloud transformations, increasing demand for high-performance networking solutions

Tariff Risks and Mitigation Strategies

Cisco acknowledged potential risks from new U.S. tariffs on China, Mexico, and Canada, but management emphasized that the company has prepared for these challenges. Cisco has spent significant time planning mitigation strategies, including supply chain diversification and cost controls to limit any negative impact.

While tariffs could introduce short-term cost pressures, Cisco’s strong pricing power and strategic supply chain management should help absorb these headwinds.

Stock Performance: Why the Market Reaction Was Muted

Despite the strong Q2 performance and AI-driven growth potential, Cisco’s stock only saw a modest uptick post-earnings. This suggests that:

1. Investors had already priced in strong results after a 35% stock rally since August

2. The market remains cautious about near-term IT spending trends, especially with macroeconomic uncertainties

3. In-line EPS guidance for Q3 tempered enthusiasm, as investors look for stronger bottom-line growth

However, the $15 billion share buyback authorization and dividend increase reinforce Cisco’s commitment to shareholder returns, which could support further upside in the long run.

Investment Outlook: Is Cisco a Buy at Current Levels?

Cisco’s revenue growth resurgence, AI-driven expansion, and strong capital returns make it an attractive long-term investment. However, given the recent rally, investors should consider valuation, near-term risks, and broader market conditions before making a decision.

Bullish Case: Why Cisco Could Continue to Rise

- AI Infrastructure Growth: Strong AI order momentum ($1B+ in FY25)

- Cloud & Enterprise Demand: Continued strength in networking and cloud-related orders

- Service Provider Expansion: 75% growth in cloud & telecom orders

- Strong Capital Returns: $15B buyback + dividend increase

- Return to Revenue Growth: 9.4% YoY growth, reversing prior declines

Bearish Case: Risks to Consider

- High Expectations Priced In: 35% stock rally since August may limit near-term upside

- Tariff Risks: Potential cost pressures from trade policy changes

- IT Spending Volatility: Enterprise and cloud investments could slow if macro conditions deteriorate

- Competitive Landscape: Facing competition from Arista, NVIDIA, and cloud-native networking solutions

Final Verdict: A Long-Term Leader with Near-Term Caution

Cisco’s strong Q2 earnings, AI-driven order growth, and resilience in enterprise networking position it as a long-term winner in the cloud and AI revolution. However, with much of the optimism already reflected in the stock price, investors may want to wait for a pullback or monitor Q3 execution before increasing exposure.

For long-term investors, Cisco remains a solid play on AI, cloud networking, and enterprise IT modernization, with the added benefit of consistent dividends and buybacks. Near-term volatility may create better entry points, but Cisco’s fundamentals remain strong.

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