How Cisco Is Building a New Growth Story for Investors

Key Points

• Surging demand for AI infrastructure validates the company's technology and creates a significant, long-term revenue stream from global customers.
• The successful integration of Splunk accelerates Cisco's strategic shift to a more predictable and high-margin software and recurring revenue business model.
• The company now presents a compelling investment profile that blends direct exposure to the AI revolution with an industry leader's financial stability and reliable income.

Cisco Systems NASDAQ: CSCO recently reported strong earnings, leading to a stock increase. But the biggest news for investors wasn’t the company’s fourth-quarter 2025 earnings; it was the confident outlook for fiscal year 2026.

Management anticipates revenue between $59 billion and $60 billion, with non-GAAP earnings per share (EPS) projected to be between $4.00 and $4.06.

This optimism has captured Wall Street's attention, prompting a key question from investors: beyond a single strong quarter, what is the fundamental strategy that gives management confidence in this bullish outlook, and is it sustainable? The answer lies in three powerful and distinct growth engines that are fundamentally reshaping the company’s future.

Cisco's AI Bet Pays Off

The most significant catalyst fueling Cisco’s optimistic forecast is its validated success in the artificial intelligence (AI) infrastructure market. What was once a strategic goal has quickly become a core, proven business. In fiscal year 2025, Cisco secured over $2 billion in AI-related orders, doubling its original $1 billion target.

This represents Cisco's essential role in the AI revolution. As companies build massive data centers, they need a high-performance networking fabric connecting thousands of specialized processors. Cisco provides that critical layer with its 800G Ethernet technology and Nexus switches.

This momentum is reflected in the stunning growth of its broader Service Provider and Cloud customer segment, where product orders surged 49% year-over-year in the fourth quarter.

Crucially, this demand is expanding beyond a handful of cloud giants. The company is now a key supplier for two emerging and durable growth areas:

• Sovereign AI: National governments investing billions to build their own AI capabilities.
• Neo Cloud Providers: A new class of companies building specialized AI cloud services.

This diversification signals a broad and sustainable demand cycle. For investors, this proven success in the high-growth AI space helps justify analyst price target upgrades and is attracting a new class of growth-oriented investors, fundamentally changing the narrative around the stock.

Cisco’s Key to Higher Margins and Stability

A fundamental shift in Cisco’s business model toward more predictable, high-margin software and services is supporting its AI-driven growth. This transformation is being supercharged by successfully integrating its blockbuster acquisition, Splunk. 

The results are clear: Cisco now boasts $31.1 billion in Annual Recurring Revenue (ARR). Further quantifying this shift, total subscription revenue now accounts for 54% of Cisco’s total revenue, showcasing its reduced reliance on cyclical hardware sales.

The collaboration between the two companies is showing to be effective.

During its recent earnings call, management highlighted a 14% year-over-year increase in new logos for Splunk, demonstrating that Cisco's massive sales channel is successfully expanding Splunk's market reach.

This combination positions Cisco as an integrated leader in two of the most critical areas of IT spending today: cybersecurity and observability. As organizations deploy complex AI applications, the ability to secure and monitor them becomes paramount.

This integrated platform creates a decisive advantage over smaller competitors. For the stock, a higher mix of software revenue leads to greater financial predictability and supports a stable, growing dividend.

A Foundational Refresh Cycle Provides a Tailwind

While AI and software represent the new, high-growth chapters of Cisco’s story, its traditional core business is not standing still. A third pillar supporting its forward guidance is a major, multi-year upgrade cycle underway in enterprise and campus networking. The trigger for this is the launch of Cisco's new line of Catalyst 9000 "smart switches."

The opportunity is massive, with tens of billions of dollars worth of pre-Catalyst 9k systems still installed in customer networks, ripe for an upgrade.

AI is driving the need for this upgrade. As companies begin to run AI applications on their premises, their internal networks require more power, speed, and sophisticated, embedded security. This creates a compelling reason for customers to modernize.

This refresh cycle provides a steady and reliable stream of product revenue that de-risks the overall growth story, giving investors confidence that the foundational business remains strong.

Growth, Income, Value: The Cisco Trifecta

When combined, these three pillars create a uniquely compelling investment profile that balances multiple objectives, all supported by a rock-solid financial foundation. Cisco’s robust fiscal 2025 operating cash flow of $14.2 billion provides ample capacity for reinvestment and shareholder returns.

• Growth: The AI infrastructure business and the software transformation provide clear, tangible catalysts for accelerated revenue and earnings growth.
• Income: Cisco offers a reliable 2.45% dividend yield. Its sustainability is exceptionally strong, with a dividend payout ratio of just 43.2% of cash flow, leaving significant room for future increases on top of its 13-year growth streak.
• Value: With a price-to-earnings ratio (P/E) of approximately 25.56 and a healthy debt-to-equity ratio (D/E) of just 0.49, the stock offers a reasonable entry point for a company with a newly validated growth trajectory, especially when compared to the sky-high valuations of many pure-play AI stocks.

Investing in a Tech Titan Reborn

The strategy is clear. The combination of a validated AI growth engine, a successful pivot to software, and a modernizing core business has created a new blueprint for Cisco.

The company now stands out in the tech sector, offering investors a rare and compelling opportunity that blends direct exposure to the AI revolution with the financial stability and reliable income of an established industry leader.