Cisco’s F3Q26 beat was driven by AI and campus networking orders, but the rating remains Neutral

Overview

This report reviews Cisco Systems Inc.’s F3Q26 results. EPS, revenue, and EBIT all exceeded Goldman Sachs and market consensus expectations, driven mainly by accelerating Networking, stronger AI optics/systems orders, enterprise data center demand, and campus refresh activity. The company also raised FY2026 guidance and introduced a framework for F2027 revenue above $68bn, including long-term revenue growth of 4%-6% and about $2bn of incremental AI revenue.

Core views

Goldman Sachs’ core view is that Cisco’s order momentum has strengthened materially in AI networking, Silicon One systems and optics, and campus switching and wireless refreshes, improving medium-term revenue visibility. However, a higher hardware mix and memory cost inflation are pressuring gross margins, and the Security business remains affected by legacy product declines and Splunk’s shift from on-premises deployments to cloud subscriptions. Although the company is protecting margins through price increases, contract adjustments, component purchase commitments, and reducing memory usage in certain products, the rating remains Neutral.

Analysis framework

The report mainly uses earnings comparisons, order trends, business segment breakdowns, guidance changes, and valuation multiple adjustments. Goldman Sachs compares actual F3Q26 EPS, revenue, gross margin, and EBIT margin with its forecasts, market consensus, and company guidance, and raises F2026/27/28 EPS estimates by an average of 4% based on the AI revenue outlook and product order momentum. On valuation, the target price is based on 23x NTM+1Y EPS, up from 16x previously, reflecting greater growth visibility from AI and enterprise modernization.

Methodology notes

• Valuation methodsNTM+1Y EPS multiple

  Forward P/E valuation

  Goldman Sachs uses 23x NTM+1Y (Q5-Q8) EPS as the valuation base and raises the 12-month target price to $116. The higher multiple reflects greater long-term growth visibility from AI networking, optics, in-house Silicon One, and enterprise network modernization.

• factor_profileGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factor comparison

  Goldman Sachs Factor Profile compares individual stocks with the market and industry peers across growth, financial returns, valuation multiples, and composite percentiles to provide an investment profile backdrop.

• m_and_aM&A Rank

  Framework for estimating the probability of becoming an acquisition target

  Goldman Sachs uses M&A Rank from 1 to 3 to assess the probability that a company becomes an acquisition target; if the rank is 1 or 2, merger and acquisition considerations may be incorporated into the target price.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Cisco Systems Inc. (CSCO)

  Covered company and core investment target

  Strengths

  Strong orders in AI optics/systems, Silicon One, enterprise data centers, and campus switching and wireless; leading network equipment market share; backlog, RPO, and ARR provide revenue visibility.

  Weaknesses

  Gross margin is weighed down by hardware mix and memory cost inflation; the Security business is affected by legacy product declines and Splunk cloud subscription migration; there has been share-loss pressure over the past decade.

  Comparison

  Cisco has broader network solution coverage than most peers, but faces competition in data center switching, ADC, white-box, and low-cost equipment markets from ANET, FFIV, Huawei, H3C, and white-box solutions.

  Risks

  Intensifying competition, margin pressure from changing cloud customer mix, rising supply chain costs, pricing pressure from commoditization of network hardware, and dilutive acquisitions.

• AI networking and optics

  Key growth driver

  Strengths

  F2026 AI hyperscale revenue outlook was raised to $4bn, order outlook was raised to $9bn, and F2027 AI hyperscale revenue is expected to reach $6bn.

  Weaknesses

  The sustainability of AI order and revenue conversion still depends on hyperscale customer deployment timing and supply chain execution.

  Comparison

  Cisco’s entry into AI infrastructure through Silicon One and optics is differentiated compared with solutions that rely on commercial chips fabricated on advanced process nodes.

  Risks

  Customer concentration, technology substitution, supply constraints, and competitive pricing pressure.

• Security and Splunk

  Short-term drag and potential improvement area

  Strengths

  Excluding Splunk, core Security orders grew at a double-digit year-over-year pace, with firewall, new product, and refresh product orders performing well.

  Weaknesses

  Security revenue was $2.0bn and flat year over year, weighed down by declines in legacy products and the shift of Splunk revenue from on-premises deployments to cloud subscriptions.

  Comparison

  Security growth is less robust than Networking and is the relative weak spot this quarter.

  Risks

  Longer-than-expected drag from the Splunk cloud subscription transition, slower customer migration, and intensifying cybersecurity competition.

Key data

• F3Q26 EPS$1.06Above Goldman Sachs / Visible Alpha consensus of $1.04 / $1.03 and above company guidance of $1.02-$1.04.
• F3Q26 revenue$15.8bnUp 12% year over year, above Goldman Sachs / consensus of $15.6bn / $15.5bn.
• Networking revenue$8.8bnUp 25% year over year, above Goldman Sachs / consensus of $8.3bn / $8.4bn.
• Product order growth+35% yoyAbove F2Q26's +18%; Networking product orders grew more than 50% year over year.
• AI hyperscale order outlook$9bnThe company raised its F2026 AI hyperscale order outlook from the prior $5bn to $9bn.
• F2026 AI hyperscale revenue outlook$4bnPreviously $3bn; the company also expects F2027 AI hyperscale revenue of $6bn.
• F3Q26 gross margin66.0%Down about 160 bps year over year, slightly below Goldman Sachs / consensus of 66.2% / 66.2%.
• F3Q26 EBIT$5.4bnAbove Goldman Sachs / consensus of $5.3bn / $5.3bn, with an EBIT margin of 34.2%.
• F4Q26 revenue guidance$16.7bn-$16.9bnAbove consensus of $15.8bn.
• FY2026 revenue guidance$62.8bn-$63.0bnPreviously $61.2bn-$61.7bn.
• Target price$116Previously $75, based on 23x NTM+1Y EPS.

Impact & implications

For investors, the report reinforces the logic that Cisco is transitioning from a traditional networking equipment supplier into a beneficiary of AI networking, optics, in-house chips, and enterprise modernization. Upward revisions to orders, revenue guidance, and EPS forecasts improve medium-term earnings visibility, but after the valuation re-rating, investors still need to validate AI revenue realization, the sustainability of campus refresh activity, the effectiveness of gross margin defenses, and the pace of improvement in the Security/Splunk transition.

Risks

• Gross margin remains under pressure from a higher hardware mix and memory cost inflation.
• The Security business is weighed down by legacy product declines and the Splunk cloud subscription transition, and improvement may take longer than expected.
• The networking equipment market is highly competitive, including Huawei, H3C, white-box solutions, and competitors in specific vertical niches.
• A higher share of cloud customers may create structural margin pressure.
• Supply chain costs, component prices, and commoditization of network hardware may lead to pricing pressure.
• Acquisitions may bring dilution risk.

What to watch

• Whether F4Q26 revenue, EPS, gross margin, and EBIT margin meet company guidance.
• Progress toward the F2026 AI hyperscale revenue target of $4bn and order target of $9bn.
• The achievability of F2027 AI hyperscale revenue of $6bn and the framework for total revenue above $68bn.
• Whether campus network refreshes continue to evolve into a multi-year, multi-billion-dollar opportunity.
• Whether price increases, contract changes, component purchase commitments, and reduced memory usage are sufficient to stabilize EBIT margins.
• Whether the Splunk cloud subscription transition drag begins to ease starting in F2Q27.