Cisco Shares Fall Despite Record Results Due to Margin Pressure

Cisco Systems shares have been falling despite record fourth-quarter and full-year results. The stock dropped 8.4% on August 13 to close at $113.47, down from $123.88 the previous session.

The decline was unexpected given the company's strong performance, with revenue up 18% year-on-year and non-GAAP earnings beating analyst estimates. However, the culprit behind the fall is not demand but rather margin pressure.

Cisco's AI-optimized networking hardware costs more to produce than its legacy routing and switching gear, which has led to a compression of the company's non-GAAP gross margin from 68.4% to 66.3%. This shift in product mix is causing investors to reprice the shares, even as the top line grows.

The market is pricing in the higher costs associated with AI infrastructure, which accounted for $9.3 billion in orders across the year. Cisco is guiding towards $7.5 billion of AI infrastructure revenue in fiscal 2027, indicating a genuine growth opportunity despite the margin pressure.