Cisco Systems Inc. delivered a fiscal second-quarter earnings report that, by most conventional measures, should have sent shares higher. Revenue topped analyst expectations. Earnings per share came in above consensus. And the networking giant’s push into artificial intelligence infrastructure continued to gain momentum. Yet when the dust settled in after-hours trading, Cisco’s stock slipped — a reminder that in today’s market, merely meeting forward-looking expectations is no longer enough to satisfy investors hungry for upside surprises.

The results, reported on Wednesday, underscore a growing tension in how Wall Street evaluates legacy technology companies attempting to reinvent themselves for the AI era. Cisco is no longer just a maker of routers and switches; it is positioning itself as a critical enabler of the data center buildout powering generative AI workloads. But the market’s reaction suggests that investors want more than a steady transformation — they want acceleration.

The Numbers: A Clean Beat That Wasn’t Enough

According to CNBC, Cisco reported adjusted earnings per share that exceeded Wall Street’s consensus estimate, while revenue also came in above what analysts had projected. The company’s top line reflected continued strength in its enterprise networking and security businesses, with particular momentum in orders tied to AI-related infrastructure. Management highlighted robust demand from hyperscale cloud providers and large enterprises investing in next-generation data center architectures.

Despite the beat, Cisco’s fiscal third-quarter guidance landed roughly in line with analyst expectations — neither materially above nor below the consensus range. That was the detail that mattered most to traders. In a market environment where companies like Arista Networks and Broadcom have been rewarded for delivering guidance that meaningfully exceeds estimates, Cisco’s in-line outlook was interpreted as a signal that the company’s AI-driven growth trajectory may not be as steep as some bulls had hoped. Shares declined in extended trading following the report, as noted by CNBC.

The AI Infrastructure Arms Race and Cisco’s Place in It

Cisco’s results arrive at a moment when the technology sector is consumed by a singular question: who benefits most from the massive capital expenditure cycle being driven by artificial intelligence? The largest cloud providers — Microsoft, Amazon, Google, and Meta — have collectively committed hundreds of billions of dollars to building out AI-capable data centers over the next several years. Every networking equipment maker, chip designer, and infrastructure software company is jockeying for a piece of that spending.

Cisco has made significant strides in this arena. The company’s Silicon One networking chips, its Nexus data center switches, and its growing portfolio of AI-optimized networking solutions have positioned it as a credible player in high-performance computing environments. CEO Chuck Robbins has repeatedly emphasized that Cisco is seeing a new wave of demand driven by customers who need to connect clusters of thousands of GPUs — the kind of dense, high-bandwidth networking that plays directly to Cisco’s strengths. The company’s acquisition of Splunk, completed in 2024, has also bolstered its security and observability capabilities, giving it a broader value proposition for enterprises building AI infrastructure.

Why In-Line Guidance Stings More Than It Should

The market’s negative reaction to Cisco’s guidance reflects a broader phenomenon that has become increasingly pronounced during this earnings season. Investors have become conditioned to expect not just beats on current-quarter results — which are often managed through conservative pre-announcements and analyst whisper numbers — but also meaningful raises to forward guidance. Companies that deliver the former without the latter are frequently punished, regardless of the underlying health of their businesses.

This dynamic is particularly acute for companies like Cisco that are in the midst of a strategic transformation. The stock had already appreciated significantly over the prior twelve months, pricing in expectations of accelerating AI-related revenue. When the guidance merely confirmed those expectations rather than exceeding them, some investors took profits. It is a pattern that has played out across the technology sector, where names like Palo Alto Networks and ServiceNow have experienced similar post-earnings pullbacks despite reporting strong results.

Recurring Revenue and the Splunk Integration

One area where Cisco continues to make meaningful progress is in its shift toward recurring revenue. The company has been transitioning its business model away from one-time hardware sales and toward subscription-based software and services for several years. The Splunk acquisition significantly accelerated this transition, adding a large base of recurring software revenue and deepening Cisco’s capabilities in security analytics and IT operations.

Management indicated that annualized recurring revenue continued to grow at a healthy clip during the quarter, and that the integration of Splunk is proceeding on schedule. For long-term investors, this is arguably the most important metric to watch. A higher mix of recurring revenue improves the predictability of Cisco’s earnings, supports higher valuation multiples, and reduces the company’s exposure to the cyclical swings that have historically characterized the networking hardware business. The challenge is that this transformation is gradual, and in a market fixated on quarter-to-quarter momentum, gradual improvements can be overshadowed by near-term guidance dynamics.

Competitive Pressures and Market Share Battles

Cisco does not operate in a vacuum. In the data center networking market, it faces intensifying competition from Arista Networks, which has emerged as the preferred vendor for many hyperscale cloud providers. Arista’s stock has significantly outperformed Cisco’s over the past two years, driven by the perception that Arista is more directly leveraged to AI data center spending. Broadcom, through its acquisition of VMware and its custom silicon business, represents another formidable competitor in the broader infrastructure stack.

In the enterprise networking and security markets, Cisco contends with Juniper Networks — now in the process of being acquired by Hewlett Packard Enterprise — as well as Fortinet, Palo Alto Networks, and a host of smaller players. The breadth of Cisco’s portfolio is both a strength and a vulnerability: it allows the company to offer integrated solutions that span networking, security, and observability, but it also means that Cisco must compete effectively across multiple fronts simultaneously. Any perceived weakness in one segment can weigh on overall sentiment, even when other parts of the business are performing well.

What the Sell-Side Is Saying

Analyst reactions to Cisco’s report were mixed but generally constructive. Several firms maintained their buy-equivalent ratings on the stock, arguing that the pullback in after-hours trading represented a buying opportunity given Cisco’s improving growth profile and reasonable valuation. Others were more cautious, noting that the in-line guidance suggests the company may face tougher comparisons in the second half of the fiscal year and that the pace of AI-related order growth, while encouraging, has yet to reach the inflection point that would justify a significantly higher multiple.

The consensus view appears to be that Cisco is executing well on its strategic priorities but that the stock’s upside from here depends on the company’s ability to deliver above-consensus results in the coming quarters — particularly as AI infrastructure spending shifts from planning and ordering to actual deployment and revenue recognition. The next several quarters will be critical in determining whether Cisco can translate its growing order book into the kind of revenue acceleration that the market is demanding.

The Bigger Picture for Tech Earnings Season

Cisco’s experience this earnings season is emblematic of a broader challenge facing the technology sector. After a historic run-up in valuations driven by AI enthusiasm, investors are becoming more discerning about which companies are truly benefiting from the AI spending cycle and which are merely adjacent to it. The bar for positive stock reactions has risen considerably, and companies that cannot demonstrate tangible, accelerating revenue growth tied to AI are finding it difficult to sustain their multiples.

For Cisco, the path forward is clear but demanding. The company must continue to grow its AI-related pipeline, accelerate its recurring revenue transition, and demonstrate that the Splunk acquisition is delivering the strategic and financial benefits that management promised. If it can do so, the current post-earnings dip may indeed prove to be a buying opportunity. But if guidance continues to merely meet expectations rather than exceed them, investors may increasingly question whether Cisco’s AI story is as compelling as those of its faster-growing peers. In a market that rewards outperformance and punishes adequacy, being good enough is no longer good enough.