Cisco Is Selling a Ton of AI Gear. Why Did Its Stock Dip?
Cisco reported its fiscal fourth-quarter and full-year 2026 earnings on August 12. Adjusted earnings per share came in at $1.22, up 23% from a year earlier. The company posted an operating margin of 24.7% under standard accounting rules (GAAP) and 24.3% on an adjusted basis (Cisco Investor Relations). The stock has risen over 60% in 2026 amid what the company calls an AI "supercycle," though shares pulled back after the earnings report (MarketWatch).
AI infrastructure demand became the dominant story for Cisco's networking business this year. Networking product orders rose over 50% in fiscal 2026, and the company expects roughly $9 billion in AI infrastructure orders for the full year (Reuters). That order growth is the engine driving the business. The friction is what happens to profit on each sale.
Here is the tension. Gross margin is the percentage of revenue a company keeps after paying the direct costs of making its products. Think of it like this: if you sell a laptop for $1,000 and the parts and labor cost $600, your gross margin is 40%. Cisco's gross margin fell to 66.3% in the fourth quarter, down from 68.4% a year earlier (MarketWatch). For the next quarter, the company forecast an adjusted gross margin of 65% to 66%, slightly below the 66.10% analysts expected (Reuters).
That guide-down, however small, fits a year-long pattern. Q3 fiscal 2026 showed a total gross margin of 63.6%, with product gross margin at 61.9% and services at 69.2% (Cisco Investor Relations). Q1 fiscal 2026 product gross margin was 64.5% (Cisco Investor Relations). In the fiscal second quarter, an adjusted gross margin of 67.5% missed analyst estimates, and shares dropped 7% (Yahoo Finance).
The reason is straightforward. The AI-related networking hardware Cisco is selling a lot of carries lower profit margins than some of its other products. So as more of Cisco's revenue comes from that hardware, overall gross margin shrinks. Cost-cutting elsewhere in the business has cushioned the impact at the operating level (24.7% GAAP in Q4), but management's next-quarter outlook suggests that cushion will hold, not improve.
Cisco also guided fiscal Q1 2027 revenue to $15.0 billion to $15.2 billion, an outlook first signaled in its Q1 fiscal 2026 release (Cisco Investor Relations). Separately, the company announced plans earlier in the year to cut about 4,000 jobs, roughly 5% of its workforce, as part of an AI-focused restructuring (Reuters).
The margin question is the one investors should be watching. A stock that has already climbed 60% in a year reflects very high expectations. Investors are pricing in not just continued order growth but also improving profitability as AI revenue scales. Cisco's own guidance, however, points to gross margin at or slightly below what analysts expect, and the full-year numbers show that margin shrinking quarter after quarter. The restructuring, if it works, could lower costs and help profitability. But the gap between the headline story, record AI-driven growth, and the margin reality, shrinking profit on each sale, is what drove the stock's pullback.
For a company whose stock has already run 60% in a single year, the bar for upside surprise has moved higher. The Q4 results are strong on the top line. The market's pullback reflects the cost of getting there.
