Cisco: Undervalued AI Infrastructure Leader with Strong Order Growth and a Buy Rating Justified

Cisco Systems (CSCO) has long been a cornerstone of enterprise networking, but its recent pivot toward AI infrastructure has positioned it as a stealth leader in one of the most transformative tech sectors. Despite a mixed analyst consensus and a price-to-sales (P/S) ratio of 4.89x—higher than historical averages—the company's Q2 CY2025 results reveal a compelling case for undervaluation. With AI infrastructure orders surpassing $2 billion (double its initial target), a robust order book, and forward-looking innovations, Cisco is quietly building a moat in the AI era.

The AI Infrastructure Boom: Cisco's Strategic Edge

The global AI infrastructure market is projected to grow at a 30% CAGR through 2030, driven by surging demand for high-speed connectivity, low-latency processing, and scalable cloud solutions. Cisco's recent product launches and partnerships have placed it at the forefront of this shift.

• Product Innovation: The April 2025 launch of 800G Nexus switches, powered by the 51.2 terabit Silicon One chip, addresses the bandwidth and latency demands of AI cloud buildouts. These switches, combined with the Cisco AI POD (a pre-integrated AI deployment solution) and HyperFabric (a high-speed connectivity platform), reduce implementation time by 40% and operational risk by 30%, according to internal metrics.
• Ecosystem Partnerships: Strategic alliances with NVIDIA, AMD, and BlackRock's $30 billion AI Infrastructure Partnership with Microsoft underscore Cisco's ability to integrate its hardware with leading AI software stacks. The acquisition of Splunk for $28 billion further bolsters its observability and security offerings, critical for AI-driven enterprises.
• Operational Efficiency: Cisco's AgenticOps framework, powered by a domain-specific large language model trained on decades of network data, automates end-to-end operations, cutting task completion times by 50%. This not only enhances customer value but also positions Cisco as a leader in AI-native infrastructure.

Financial Fundamentals: Strong Order Growth and Margin Expansion

Cisco's Q2 CY2025 earnings report highlights its ability to convert AI demand into financial performance. Total revenue rose 7.6% YoY to $14.67 billion, with non-GAAP operating income expanding to $4.9 billion (34.7% margin). AI infrastructure orders alone hit $350 million in Q2 and $700 million year-to-date, with three of the top six webscale clients reporting triple-digit growth.

Key metrics include:
- Free Cash Flow Margin: 27.4% in Q2, up from 25.9% in CY2024.
- Annual Recurring Revenue (ARR): $30.1 billion, a 22% YoY increase, driven by recurring security and observability services.
- EBITDA Margin: 38.6%, 2.7% above estimates, reflecting pricing power in high-margin AI infrastructure.

While some analysts question Cisco's 4.4% long-term revenue growth rate, the company's AI infrastructure segment is growing at 15–20% YoY, outpacing its overall revenue growth. This divergence suggests untapped potential as AI adoption accelerates.

Market Underappreciation: Why the Buy Rating is Justified

Despite its strong fundamentals, Cisco's stock trades at a discount to its intrinsic value. A P/S ratio of 4.89x lags peers like Arista (P/S ~6.5x) and NVIDIA (P/S ~20x), even as Cisco's AI infrastructure orders grow at a faster clip. This disconnect stems from two factors:

1. Short-Term Valuation Concerns: Critics argue that Cisco's 10-year revenue CAGR of 4.4% is below the S&P 500 average. However, this metric fails to account for the explosive growth in AI infrastructure, which now accounts for 15% of Cisco's revenue and is projected to reach 30% by 2027.
2. Geopolitical and Competitive Risks: Open-source solutions and geopolitical tensions in sovereign cloud deals pose challenges. Yet, Cisco's diversified customer base (60% enterprise, 40% webscale) and its focus on proprietary silicon (e.g., Silicon One) provide a durable competitive edge.

The current consensus price target of $72.29 implies a 7% upside, but a deeper analysis suggests higher potential. If Cisco maintains its current AI infrastructure growth rate and expands its operating margin by 100 bps annually, its intrinsic value could reach $85–$90 by 2026.

Investment Thesis: Buy for Long-Term AI Exposure

Cisco's strategic alignment with the AI infrastructure boom, coupled with its financial discipline and product innovation, makes it an attractive buy for investors seeking exposure to the next decade of tech growth. Key catalysts include:
- Execution on AI Targets: Exceeding the $1 billion AI infrastructure order goal by Q4 CY2025.
- Margin Expansion: Leveraging its 68.7% non-GAAP gross margin to fund R&D and shareholder returns.
- Strategic M&A: Potential bolt-on acquisitions in AI observability or edge computing to accelerate growth.

Risks to Consider: A slowdown in webscale spending, regulatory hurdles in AI hardware, or margin compression from open-source alternatives. However, Cisco's ecosystem partnerships and silicon-based differentiation mitigate these risks.

Conclusion

Cisco is not just a networking company—it's an AI infrastructure architect. Its robust order book, margin expansion, and strategic investments in silicon and AI-native tools position it to outperform in a market that underappreciates its role. For investors willing to look beyond short-term valuation concerns, Cisco offers a compelling entry point into the AI revolution.

Final Recommendation: Buy Cisco (CSCO) for long-term AI exposure, with a target price of $85–$90 by 2026.