Cisco Systems (CSCO): Riding the AI Wave with Strong Execution and Undervalued Potential

Cisco Systems (CSCO) has quietly emerged as a key player in the AI infrastructure and cybersecurity markets, leveraging its acquisition of Splunk and strategic product innovations to drive growth amid a challenging tech landscape. With AI order momentum exceeding $700 million year-to-date and a robust free cash flow outlook, Cisco is positioned for long-term success—if investors can look past near-term macroeconomic headwinds.

The Pivot to Software and AI: A Strategic Rebirth

Cisco's transformation from a legacy networking company to a leader in AI-driven infrastructure and software is now in full swing. The $350 million in AI-related orders in Q2 FY2025—with a full-year target of $1 billion—highlight the demand for its AI PODs, HyperFabric systems, and 800G Nexus switches. These solutions cater to hyperscalers and enterprises building out AI workloads, a market expected to grow exponentially in the coming years.

The integration of Splunk, a $28 billion bet, is also paying dividends. Security revenue surged 117% year-over-year in Q2, driven by Splunk's observability tools and Cisco's XDR and SASE products. The combined offering—now serving 1 million enterprise users—positions Cisco to capitalize on the $100 billion cybersecurity market.

Cash Flow and Valuation: A Bargain at 16x Forward P/E

Cisco's financial discipline remains a standout advantage. Despite one-time costs from acquisitions and capex investments, free cash flow for FY2025 is projected at $13.14 billion, supporting its $5.2 billion remaining buyback authorization and a 3% dividend hike to $0.41 per share.

The stock trades at a forward P/E of ~16x, below its five-year average of 21x and well below peers like Palo Alto Networks (PANW) at 30x. Analysts see fair value at $70–$75, implying 16%–25% upside from current levels (~$60). With a 5% free cash flow yield (vs. the S&P 500's 3%), Cisco offers both defensive and growth appeal.

Execution Risks: Manageable but Present

No investment is without risks. Tariffs on Chinese imports and slower U.S. federal spending could pressure margins. Cisco's networking segment also declined 3% YoY, reflecting a maturing market. However, the company's supply chain agility—minimal government revenue exposure (<10%) and Splunk's secular growth—mitigate these concerns.

Investment Thesis: Buy the Dip, Target $75 by FY2026

Cisco is a rare blend of dividend reliability (2.7% yield, 18-year growth streak) and high-growth opportunities in AI and security. The stock's recent breakout above $60 resistance, coupled with strong Q3 earnings, suggests technical support.

Buy recommendation: Accumulate shares at current prices, targeting $75 by FY2026. Risks are manageable, and Cisco's long-term moats in networking, security, and software-as-a-service (SaaS) make it a resilient tech play.

Final Take

Cisco's pivot to AI and cybersecurity isn't just a rebrand—it's a calculated shift to higher-margin, recurring-revenue businesses. With execution proving robust and valuation compelling, CSCO is a strategic buy for investors willing to look past short-term noise.

Data as of June 2025. Always consult a financial advisor before making investment decisions.