Should Cisco Stock Be in Your Portfolio Pre-Q4 Earnings? A Deep Dive into Momentum, AI Growth, and Valuation

Cisco Systems (CSCO) has long been a cornerstone of the tech sector, but its recent performance has sparked renewed debate about its role in investor portfolios. With Q4 earnings on the horizon, the question is whether Cisco's strong earnings momentum, AI-driven growth, and strategic partnerships justify its current valuation—or if the stock is overpriced for its near-term prospects. Let's dissect the numbers, context, and risks to determine if Cisco deserves a spot in your portfolio.

Earnings Momentum: A Resilient Core Business

Cisco's Q3 2025 results were a masterclass in execution. Revenue surged 11% year-over-year to $14.15 billion, crushing the $14.08 billion StreetAccount estimate, while adjusted EPS of $0.96 outperformed the $0.92 forecast. This performance wasn't a one-off: the company's guidance for Q4 ($14.5–14.7 billion revenue, $0.96–0.98 EPS) edged above analyst expectations, even after factoring in 30% tariffs on Chinese goods and 25% tariffs on Canadian and Mexican imports.

The strength lies in Cisco's core segments. Networking revenue rose 8% to $7.07 billion, and security revenue jumped 54% to $2.01 billion (though slightly below the $2.17 billion consensus). The Splunk acquisition, now fully integrated, is a key driver here. Meanwhile, AI infrastructure orders hit $600 million in Q3, bringing the fiscal year total to $1.25 billion—$250 million ahead of the original $1 billion target. Two-thirds of these orders were for systems, underscoring the critical role of Cisco's hardware in AI training workloads for hyperscalers.

AI and Strategic Partnerships: Building for the Future

Cisco's AI ambitions are no longer theoretical. The company has secured $1.25 billion in AI infrastructure orders from web-scale customers, with systems and optics forming the backbone of its offerings. CEO Chuck Robbins emphasized during the earnings call that Cisco's AI strategy is “secure, scalable, and seamless,” with partnerships like the NVIDIA cross-portfolio unified architecture and the Cisco Secure AI Factory positioning the company as a key player in the AI infrastructure ecosystem.

Beyond hardware, Cisco is expanding its software and services footprint. The Webex AI agent, quantum networking advancements, and a multi-phased investment in Saudi Arabia's Humain AI company highlight its global reach. Collaborations with BlackRock, Microsoft, and xAI further cement Cisco's role in shaping the next phase of AI infrastructure. These moves suggest the company is not just reacting to trends but actively defining them.

Valuation Concerns: A Premium for Growth?

Despite the bullish fundamentals, Cisco's valuation raises red flags. The stock trades at a forward P/E of 17.79, a premium to the industry average of 15.36. Its PEG ratio of 3.26 is even more concerning—triple the industry average of 1.02. This suggests investors are paying significantly more for each unit of earnings growth compared to peers like Arista Networks (PEG 1.42) or Hewlett Packard (PEG 1.02).

The price-to-book ratio of 6.19 also sits above peers like HPE (1.14) but below high-flying tech giants like Apple (51.70) and Fortinet (27.67). While Cisco's P/B ratio is moderate, its PEG ratio implies the market is pricing in AI-driven growth that may not materialize quickly enough to justify the premium.

The Macro Picture: Tariffs and Market Sentiment

Cisco's guidance explicitly accounts for U.S. tariffs on steel, aluminum, and goods from China, Canada, and Mexico. While the company claims no “pull-ahead” of orders ahead of tariff implementations, the 30% China tariff alone could pressure margins in the short term. Additionally, the stock has underperformed the broader Computer and Technology sector, gaining just 2.32% in the past month versus the sector's 5.77%. This underperformance may reflect skepticism about whether Cisco's AI growth will translate into sustained revenue and earnings gains.

Investment Thesis: A Calculated Bet

Cisco's Q3 results and AI momentum are undeniably impressive. The company is winning in critical areas—networking, security, and AI infrastructure—and its strategic partnerships position it to benefit from the AI boom. However, the valuation premium demands scrutiny. A PEG ratio of 3.26 implies investors expect earnings growth that outpaces the current 1.61% full-year EPS estimate. If AI infrastructure revenue accelerates as projected (with $1.25 billion in orders already secured), this could justify the premium.

For investors:
- Bull Case: Cisco's AI infrastructure orders and partnerships could drive revenue growth above 5% in FY2025, with AI contributing meaningfully to margins in FY2026. A re-rating to a PEG of 1.5–2.0 would align the stock with industry peers.
- Bear Case: If AI adoption slows or tariffs weigh on margins, the current valuation could contract, leading to a 10–15% correction.

Conclusion: A Hold with Conditions

Cisco is a compelling story for the long term, but its near-term valuation is a hurdle. The stock is not a slam-dunk buy at current levels, but it's also not a sell. Investors should monitor Q4 results for signs of AI revenue acceleration and margin resilience. If the company delivers on its AI roadmap and the market re-rates its PEG ratio downward, Cisco could become a strong addition to a diversified portfolio. For now, a cautious “hold” is warranted, with a closer eye on valuation adjustments and execution in Q4.