Cisco: Tech Dividend Payer With Long Term AI Potential

Key Points

• Cisco Systems quietly had a strong year in 2024, returning north of 20%.
• A $28 billion acquisition in 2024 is adding to earnings earlier than expected.
• AI is becoming more important to the business, but still isn't meaningful. There are things to like about the stock in the meantime as it works to become more relevant in this space.

 

After achieving a solid return of 21% in 2024, Cisco Systems' NASDAQ: CSCO stock is rising again in 2025. As of the Feb. 20 close, shares have provided a total return of 10% on the year.

Cisco’s Feb. 12 earnings report beat estimates on several fronts, raising shares moderately in the subsequent trading days. Cisco's AI-driven business is small now, but is gaining traction.

This has excited investors. I’ll dive deep into the tech company’s AI business to understand what type of opportunity it represents for Cisco in the near and long term.

Cisco: Analyzing AI Infrastructure’s Role After Strong Earnings Report

Cisco achieved moderate growth on both the top and bottom lines in its fiscal Q2 2025. Revenue grew by 9% to nearly $14 billion, beating out estimates of $13.9 billion. Adjusted earnings per share (EPS) increased 8% to $0.94, topping estimates.

In the full fiscal 2025 year, analysts see sales rising by 5% and adjusted earnings staying flat. This comes after the company moderately raised its guidance for the year in this release.

One figure that grabbed Cisco's attention was its uptick in AI infrastructure orders. These came in at $350 million for the quarter, resulting in $700 million in orders through the first half of its fiscal year.

Overall, Cisco is expecting over $1 billion in AI infrastructure orders in 2025. Although it is good to see Cisco starting to participate more in AI infrastructure spending, I'll put these numbers in the proper context.

Compared to the firm’s $56.5 billion in expected revenue for fiscal 2025, the AI orders figure is only equal to around 1.7% of that total. AI orders are unlikely to make up even that amount of revenue, considering orders imply future revenue. It will take time for Cisco to recognize this as actual revenue.

Thus, at this point, it doesn’t make sense to consider Cisco an important player in AI infrastructure. However, it could contribute more meaningfully long term. Additionally, infrastructure isn’t the only way Cisco is participating in AI.

CSCO: Splunk Acquisition Showing Its Value

Splunk has been a substantial addition to Cisco. Its security and observability segments grew by 117% and 47% from a year ago. It is helping drive higher margins and was accretive to adjusted EPS last quarter, which was sooner than expected.

Through its acquisition of Splunk, Cisco is using AI to help enterprises become more secure. Hypershield is the company’s AI-driven threat detection and response software.

In Q2, Hypershield booked two Fortune 100 customers. In Jan., Cisco launched AI Defense. The software helps enterprises develop and deploy AI applications securely. Cisco said the response from early access customers was "phenomenal." It plans to launch general availability in March.

CSCO: Key Enterprise Partner With Lots to Like

Cisco may not be an exciting player in the AI revolution right now, but it still has many appealing qualities. The company returned $2.8 billion to shareholders just last quarter.

It has a substantial buyback capacity worth 6.6% of its overall market cap, which it can use to support its share price.

Cisco also has a healthy dividend yield of 2.5%, over double the 1.2% yield of the S&P 500. Its dividend yield ranks in the top ten among U.S. large-cap technology companies.

Cisco also ranks in the top 10 among this peer group when it comes to cash on its balance sheet and free cash flow generation last quarter. This could allow the company to engage in acquisition activity to enhance its position strategically.

However, a massive acquisition is unlikely to happen anytime soon. Cisco is currently saddled with over $32 billion in debt due to its $28 billion acquisition of Splunk in Q1 2024.

MarketBeat tracked eight Wall Street analysts who updated their price targets after Cisco’s earnings release. On average, they raised their targets by 14%, significantly more than the 3% rise Cisco shares have seen post-earnings. Their price targets imply an average upside in Cisco shares of 9%, compared to a Feb. 21 morning trading price of $64.67.

Overall, Cisco remains a key partner for many large enterprises around the world. As these companies look to implement AI further, Cisco can be a significant beneficiary long-term. This is true for both infrastructure and software solutions.

The company’s sticky enterprise partnerships help limit downside risk. Cisco has strong financials and is willing to return capital. These factors can make it a bellwether tech stock, which can also benefit from AI growth in the long run.