Cisco Systems (NASDAQ:CSCO) experienced a sharp decline on Friday, with shares falling 4.5% to $113.77. The drop erased approximately $21 billion in market capitalization as trading volume surged to 50.1 million shares, well above the average of 28.1 million. The sell-off was largely attributed to the annual reconstitution of the FTSE Russell indexes, which drove significant trading activity across the market.
Index Rebalancing Impact
The FTSE Russell rebalancing, which took effect after the U.S. market closed on Friday, was described by Jefferies analyst Steven DeSanctis as “really massive.” Reuters reported that index-related trading for the day totaled roughly $150 billion. A Nasdaq Trader alert confirmed that Russell used the Nasdaq Closing Cross to price Nasdaq-listed stocks for its annual rebalancing, contributing to the heavy volume in Cisco shares.
Analyst Optimism Amid Valuation Concerns
Despite the decline, KeyBanc analyst Jackson Ader maintained an Overweight rating on Cisco and raised the price target to $130 from $125. The new target sits just 37 cents below Cisco’s 52-week high of $130.37, implying roughly 14% upside from Friday’s closing price. However, valuation remains a key concern. Cisco’s stock currently trades at about 26.6 times the midpoint of its fiscal 2026 non-GAAP EPS guidance of $4.27 to $4.29. KeyBanc’s target would push that multiple to approximately 30.4, a level that may be hard to justify given that AI revenue still represents only a minority of total sales.
AI Orders and Revenue Conversion
Cisco is counting on its AI infrastructure business to drive future growth. The company expects AI-related revenue from hyperscalers to reach around $4 billion in fiscal 2026, or about 6.4% of its projected full-year revenue range of $62.8 billion to $63.0 billion. Cisco has reported $5.3 billion in AI infrastructure orders from hyperscalers so far this year and raised its fiscal 2026 AI orders outlook to approximately $9 billion, up from an earlier estimate of $5 billion. The key challenge now is converting this order book into recognized revenue while maintaining momentum in its core networking business.
Strong Core Business Performance
In its fiscal third quarter, Cisco reported total product orders climbed 35% year over year, or 19% excluding hyperscalers. Networking product orders surged more than 50%, with campus networking orders up over 25% and data-center switching orders rising over 40%. CEO Chuck Robbins highlighted “record quarterly revenue” and strong demand for connecting and securing AI. CFO Mark Patterson noted that non-GAAP operating income also reached a record. Third-quarter revenue came in at $15.8 billion, up 12%, with non-GAAP EPS of $1.06, up 10%.
Broader Market Context
The decline in Cisco was part of a broader sell-off in AI infrastructure and networking stocks. Arista Networks (NYSE:ANET) fell 4.7%, while Hewlett Packard Enterprise (NYSE:HPE) dropped 6.5%. The Invesco QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq-100, declined 1.35%. Wall Street remains jittery ahead of next week’s jobs report, with higher interest rates putting pressure on high-valuation tech stocks. Julia Hermann of New York Life Investment Management noted that the key question is whether higher rates threaten the “cyclical and volatile” leaders.
Capital Returns and Dividends
Cisco continues to return capital to shareholders. In the third quarter, the company returned $2.9 billion through share buybacks and dividends, including the repurchase of about 16 million shares at an average price of $80.28. Cisco still has $9.6 billion remaining on its buyback plan. The company declared a quarterly dividend of 42 cents per share, payable on July 22 to shareholders of record as of July 6.
