Cisco (CSCO.US) Q1 Earnings Exceed Expectations, Wall Street Analysts Don't Buy: High AI Growth Can't Hide Hidden Concerns About Order Slowdown

The Zhitong Finance App learned that Cisco (CSCO.US)'s report card for the first quarter of the 2027 fiscal year looks impressive, but it conceals hidden concerns: on the one hand, strong demand for AI infrastructure combined with strong operating leverage, caused the company to hand over bright answers that both revenue and profit exceeded expectations and raised annual guidelines; on the other hand, the order growth rate, which is a forward-looking indicator, has slowed significantly. This “mixed” report card directly triggered Wall Street institutions to re-examine the rationality of their valuations and subsequent growth momentum.

Bernstein: Defensive attributes stand out, but deals are “crowded” and expectations are high

Bernstein maintains Cisco's “on par with the market” rating, with a target price of $110. Bernstein believes that Cisco's latest earnings report is generally stable, but the downside is that orders are slowing down sharply. Analysts pointed out that Cisco's total order growth rate fell sharply to 21% from 35% in the previous quarter (14% after excluding hyperscale customers). What makes the market even more wary is that if revenue plus changes in remaining performance obligations (RPO) are used as proxy indicators for orders, it may even be concluded that orders fell 1.3% month-on-month.

Although Cisco raised its AI infrastructure revenue target from 7.5 billion US dollars to 9 billion US dollars, and orders for enterprise-level products are still growing 15%, Bernstein believes that “poor expectations” in the technology hardware industry are often reflected in marginal changes.

Bernstein said bluntly that Cisco's stock price has been drastically revalued this year, and has even broken through the high point during the Internet bubble. Currently, it is a “crowded transaction.” In the agency's eyes, Cisco's current positioning is a “thematic defense target”: if the AI narrative ebbs down or the market recovers deeply, Cisco's diverse and defensive business portfolio will outperform the market; however, when AI recovers, it is likely to fall behind. In view of current high expectations, tactical performance exceeding expectations is no longer sufficient to drive a substantial upward breakthrough in stock prices.

Morgan Stanley: Risk and reward have been balanced, and valuations are not flexible

Morgan Stanley maintains a “hold” rating on Cisco, with a target price of $120. Echoing Bernstein's “overcrowding theory,” Morgan Stanley downgraded Cisco's rating to “hold” due to excessive valuations before the earnings report. After the financial report was released, the bank believes that its “long and short risk return has balanced.”

Profit leverage is a highlight, but there are hidden concerns about gross margin. Morgan Stanley highly praised Cisco's operating leverage (non-GAAP operating expenses increased by only 2%, driving 38% operating margin). However, future profitability is at risk of being squeezed: as the share of hardware for low-margin hyperscale customers increases, Cisco's gross margin is expected to be dragged to around 64.5% in the second half of the year. This means that profitability in 2028 will face even greater challenges.

Demand visibility is questionable. In addition to the sharp drop in order growth from 44% to 18% in the Americas, management expects about 5 percentage points of annual revenue to be driven by “price increases.” Morgan Stanley believes that against the backdrop of decelerating orders, price increases have not only increased pressure on the sales side, but also made people wonder whether customers are stocking up ahead of time.

Cisco expects a price-earnings ratio of about 19 times, the same as the S&P 500. For a company that expects to grow 9% in 2028, that valuation isn't absolutely cheap. Morgan Stanley chose to stand still until it saw evidence that enterprise-level demand was more sustainable.

Goldman Sachs: Slowing orders weaken future visibility

Goldman Sachs maintained a “neutral” rating for Cisco, and the price target was lowered from $125 to $115. Although Goldman Sachs drastically raised Cisco's EPS forecast for the 2027-2029 fiscal year (an average increase of 12%), it still cut its target price-earnings ratio from 25 times to 18 times.

The rift between high AI growth and weak core business: Goldman Sachs dismantled Cisco's revenue growth forecast of 19% for fiscal year 2027 — AI contributed 8 percentage points, and non-hyperscale core businesses contributed 11 percentage points. Although AI guidelines were revised, the order growth rate in Q1 after excluding hyperscale AI was only 14%, and park network orders have been decelerating for three consecutive quarters.

Slowing orders weaken future visibility: Goldman Sachs pointed out that the slowdown in order growth directly indicates that growth momentum will weaken after FY2027, which drastically reduces the “visibility” of future performance. This is also the core reason Goldman Sachs lowered its target price. Until management addresses the sustainability of enterprise-side requirements (especially the campus network renewal cycle), Goldman Sachs does not believe that it has strong room for valuation expansion, even if short-term EPS exceeds expectations.

All in all, when interpreting this financial report, Wall Street analysts have set their sights on the hidden worries caused by “weakening forward-looking indicators.” Analysts generally agree with Cisco's defensive undertones and the increase brought about by AI, but in the face of decelerating orders, doubts about price increases supporting actual sales, and the dilution of gross profit brought about by hyperscale customers, the current historically high valuation lacks momentum for further expansion.