Cisco Beats Earnings But Stock Tanks 7% - Here's Why

$15.35 billion in revenue. Earnings that crushed expectations. So why did Cisco's stock plummet 7% after hours?

The market's message was crystal clear: good numbers aren't enough anymore. Investors want something else entirely.

The Numbers Tell Two Stories

Cisco's Q2 performance looked stellar on paper. Revenue jumped 10% year-over-year to $15.35 billion, beating the $15.12 billion consensus. Net income surged 31% to $3.18 billion, translating to 80 cents per share versus 61 cents a year ago.

The networking giant's core business showed impressive strength, with networking revenue climbing 21% to $8.3 billion - well above the $7.9 billion analysts expected. AI infrastructure orders hit $2.1 billion from hyperscalers during the quarter.

But here's where the story gets interesting: guidance for the current quarter merely met expectations. Adjusted earnings of $1.02 to $1.04 per share and revenue of $15.4 to $15.6 billion. Wall Street wanted more aggressive projections.

The AI Waiting Game

CEO Chuck Robbins revealed something telling during the earnings call. The real AI revenue boost from "neoclouds" - younger cloud providers beyond Amazon and Microsoft - won't meaningfully ramp until the second half of this fiscal year, becoming more pronounced in fiscal 2027.

That's a long wait in tech years. While Cisco has made AI moves - launching networking switches with Nvidia chips, partnering with AMD on Saudi Arabia's AI infrastructure - the transformational revenue impact remains frustratingly distant.

Robbins was candid about sovereign AI projects: "There's really no real need nor expectation for meaningful impact in FY26." Translation: don't hold your breath.

Memory Prices Create New Headaches

Another wrinkle emerged around memory costs. The Nvidia GPU frenzy has sent memory prices soaring, squeezing networking equipment makers. Cisco has already announced price hikes and is renegotiating channel partner contracts.

"Do I think customers will try to buy ahead in some cases? Perhaps," Robbins said. "But I don't think it's going to be a big trend in the networking side of our business."

That's a delicate balance - price increases can boost short-term margins but risk dampening long-term demand.

What Investors Really Want

The market's harsh reaction reveals a deeper truth about AI-era expectations. Investors aren't just looking for solid fundamentals anymore - they want proof that companies are capturing meaningful share of the AI goldmine.

Cisco's$2.1 billion in AI infrastructure orders sounds impressive until you consider that Nvidia alone generated over $60 billion in data center revenue last year. The networking layer, while critical, captures a smaller slice of the AI infrastructure pie.

For a company targeting 8.5% revenue growth in fiscal 2026 (implying $61.2 to $61.7 billion), that's respectable but not revolutionary in an AI-transformed world.

The Broader Market Signal

This earnings reaction reflects a broader shift in how markets value traditional tech companies in the AI era. It's not enough to be adjacent to AI or to have AI-related products. Investors want to see AI fundamentally transforming the business model and growth trajectory.

Cisco finds itself in an awkward middle ground - clearly benefiting from AI infrastructure buildouts but not positioned as a primary AI winner like chip companies or cloud providers.