Cisco's Record Year Falls Short as Investors Fear Declining Margins

Cisco Systems (CSCO) recently reported its best fiscal year ever, but investors sold off shares after the announcement. The stock currently sits at $112.36, down about 14% from its intraday high of $130.37 in June, despite a record fourth-quarter revenue of $17.3 billion, an 18% increase year-over-year that beat both revenue and profit expectations.

The problem was not the growth itself, but rather the cost associated with it: non-GAAP gross margin fell 210 basis points to 66.3%, and product gross margin dropped 270 basis points to 64.8%. The company's AI hardware business is a major contributor to this trend, carrying thinner margins than its software and services.

Cisco leans further into this trade-off with the recent partnership with Nvidia through Supermicro, expanding its Secure AI Factory. This strategic move gives Cisco a full-stack architecture compliant with Nvidia Cloud Partners and Neoclouds, but it also signals more hardware investments at the cost of margins.