Could Cisco Systems, Inc (CSCO) Soar Over 100%?

Through its core hardware and software technologies of switching, routing, and wireless, Cisco Systems, Inc. (CSCO) is the clear leader in global computer networking.  CSCO’s capabilities have made — and continue to make — the company a central player in shaping the operations of the modern internet, including the growing internet of things (IoT) landscape. Simply stated, CSCO’s technology ensures secure and reliable communications across industries.

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Why We are Bullish on CSCO:

• CSCO has transformed itself over the last few years to become more of a subscription-based revenue company.  Companies so configured generally receive premium valuations.  Nevertheless, even though subscription revenue comprised 56% of CSCO’s total FY 2025 (twelve months ended July 26, 2025) sales, up 13 percentage points in just two years, CSCO shares trade at only a 17x forward-year P/E multiple, or a ~30% discount to the S&P 500.  As investors search for ways to deploy funds in what most market participants consider a fully or overpriced stock market, we believe substantial dollars will flow into CSCO shares.
• CSCO’s rapidly growing exposure to AI infrastructure products (more than $800 million in orders received in 4Q FY 2025 alone) should prompt investors to begin recognizing CSCO as an “AI play.”  Such a designation would have very positive implications for CSCO’s P/E and enterprise value (EV)-to-revenue multiples.  More specifically, CSCO’s participation in NVIDIA’s Spectrum-X Ethernet networking platform has played a key role in its AI infrastructure order surge.  Spectrum X, which includes the Cisco Silicon One architecture that delivers the highest bandwidth routing and web scale switching across various network environments, has been enthusiastically received by hyperscalers.
• As CSCO’s AI revenue comprises a successively larger portion of consolidated sales, it seems reasonable to compare CSCO’s valuation to Arista Networks, Inc. (ANET), a much smaller networking company by revenue, but one focused on data centers and cloud connectivity.  CSCO currently trades at about one-third of ANET’s P/E multiple and less than 40% of Oracle’s multiple.  Even a modest narrowing of the valuation gap would translate into substantial gains for CSCO shares.
• For context, if CSCO simply re-rated from 17x earnings to Oracle’s multiple the stock would soar from $68 today to $170.  We are not suggesting this is likely but would note it is very possible.
• If you’re wondering why, we would point readers to the recent sell note published by our sister company, L2 Asset Management, LLC, which explained why we shed substantially all our Oracle overweight in our Large Cap Core Strategy.
• What ORCL taught us is that in a speculative market like this, all CSCO’s CEO needs to do is announce a future contract and the stock could gap higher.  Fortunately, this isn’t the only basis for our bull thesis.
• CSCO generates enormous quantities of free cash flow.  Indeed, its free cash flow in the just-completed FY 2025 was $13.3 billion, or around $3.30 per share.  This implies CSCO’s free cash flow yield is about 5%, a yield far too high for a company of CSCO’s quality.

What is the Bear Case? 

CSCO investors are concerned that, after retreating in 2023 and 2024, long-term computer network spending trends will not be as robust as many analysts forecast.  However, CSCO’s strong networking product orders over the last four quarters (+10% in each period) argues against a prospective slowdown.  In addition, CSCO’s AI infrastructure business seems likely to continue growing dramatically over the next few years.

Investment Summary

Through its core hardware and software technologies of switching, routing, and wireless, Cisco Systems, Inc. (CSCO) is the clear leader in global computer networking.  CSCO’s capabilities have made — and continue to make — the company a central player in shaping the operations of the modern internet, including the growing internet of things (IoT) landscape.  Simply stated, CSCO’s technology ensures secure and reliable communications across industries.

For example, CSCO’s switches connect devices within a geographically localized area like a university campus, a large office building, or a data center.  In particular, CSCO has a dominant 45% market position in the $40+ billion market for ethernet switches, a foundational element of network hardware that connects wired devices within a local area network, allowing them to communicate with each other and the internet.

Worldwide Top 5 Ethernet Switch Companies, 4Q 2023 – 4Q 2024 Revenue (in millions of dollars)

CSCO enjoys an even larger market share in the overall computer networking industry: about 76%, per CSIMarket.  Arista Networks, Inc. (ANET) has the next largest penetration, approximately 10%. [1]

Investors Have Been Slow to Brand CSCO as an AI Play … But the Tide May Be Turning

CSCO stands to benefit from the transformative impact of AI, but investors have been slow to apply an AI valuation premium to CSCO shares that they often assign to other companies with only a minimal linkage to the technology.  In our view, investors will likely be forced to change this stance because of the growing presence of CSCO technologies in AI-powered data centers.  We note the following: