Cisco's AI Sales Forecast Sparks Investor Concern

Cisco Systems' fourth-quarter earnings report has left investors disappointed, primarily due to a projected $7.5 billion in sales tied to the AI data center boom. This figure is notably lower than the $9.3 billion in orders for AI-related gear amassed over the past year, leading to questions about conversion rates and the overall revenue contribution from AI.

Expert Analysis on Cisco's Outlook

Woo Jin Ho, a senior analyst from Bloomberg Intelligence, joined the discussion to break down the numbers. He stated that while the $7.5 billion AI revenue forecast is "quite fine," the primary hang-up for investors lies in gross margins. Cisco reported 66% gross margins in the fourth quarter and guided to the same for the first quarter. However, a projected drop of 100 to 150 basis points in gross margins for the second and third quarters suggests that the company's earnings power may not be as robust as anticipated.

The full discussion can be found on Bloomberg Technology's YouTube channel.

Reconciling Backlog with Forecasted Revenue

The discrepancy between Cisco's backlog of AI-related orders and its forecasted AI revenue is a key point of concern. The company reported accumulating $9.3 billion in orders for AI gear over the last year. When asked if this indicates a conversion rate issue, Woo Jin Ho acknowledged that there is "some conversion rate." He also noted that the timing of this conversion is somewhat unclear and that some of these sales are expected to spill into fiscal year 2028.

This situation is not unique to Cisco. Woo Jin Ho mentioned that similar trends are being observed across optical players and semiconductor companies, largely attributed to supply tightness.

Market Interpretation and Investor Expectations

Despite Cisco CEO Chuck Robbins describing the forecast as "prudent" rather than conservative, the market's interpretation has led to a stock downturn. With Cisco's stock up over 50% year-to-date, investor expectations were heightened heading into the earnings report. The actual numbers, particularly regarding gross margins and overall sales projections, fell short of these elevated expectations.

Cisco's Strategic Position in AI

The high expectations for Cisco are rooted in its strong position within the booming AI sector. Woo Jin Ho highlighted that the two most significant growth areas in the AI play, aside from GPUs, are optics and networking silicon. Cisco has a presence in both, making it a key player in the hyperscale cloud market. The company is reportedly seeing about 100% growth in its optics business, where it holds a leading market share, and deeper penetration in networking silicon.

StartupHub.ai data indicates Cisco holds a strong score of 83/100, positioning it favorably among competitors such as Broadcom (83/100) and Armis Security (85/100), though slightly ahead of Arista Networks (73/100).