Cisco Systems Inc. (CSCO) saw its shares climb 2.23% to close at $98.72 on Monday, just shy of record territory, as traders positioned themselves ahead of the company's fiscal third-quarter earnings report due after the market closes on Wednesday, May 13. The stock briefly touched an intraday high of $98.83 during the session, reflecting renewed optimism around the networking giant's artificial intelligence (AI) infrastructure business.
The upcoming earnings release is shaping up to be a critical test for Cisco, as investors look for concrete evidence that AI-related demand can offset persistent margin pressures. Options data from Investing.com indicates that traders are bracing for a post-earnings move of approximately 5.8% in either direction, highlighting the uncertainty surrounding the report.
Polymarket prediction contracts, though thinly traded, suggest strong bullish sentiment. Traders are pricing in a 94% probability that Cisco will exceed the consensus estimate of $1.04 in non-GAAP adjusted earnings per share. Additionally, there is a 69% chance that hyperscaler AI orders—those from major cloud providers—will reach $2 billion or more for the quarter. These figures reflect trader sentiment rather than a broad market consensus, given the low volume of these contracts.
The AI narrative has been a key driver for Cisco's recent momentum. In the fiscal second quarter, the company reported a 10% revenue increase to $15.3 billion, with product orders rising 18% and networking product orders surging over 20%. AI infrastructure orders from hyperscalers totaled $2.1 billion in that period, and CEO Chuck Robbins emphasized Cisco's role in providing the "trusted infrastructure" for the AI age. The company has guided for AI orders to exceed $5 billion in fiscal 2026, with over $3 billion in AI infrastructure revenue from hyperscalers alone.
However, the earnings test goes beyond a simple beat. Cisco has guided for fiscal Q3 revenue in the range of $15.4 billion to $15.6 billion and non-GAAP EPS of $1.02 to $1.04. The company also projects non-GAAP gross margin between 65.5% and 66.5%, a key metric that slipped 1.2 percentage points year-over-year in the second quarter due to product mix and higher memory costs. Investors will be watching closely to see if AI-related revenue can compensate for these margin headwinds.
Not all segments are performing equally. While networking revenue jumped 21% in Q2, security revenue slipped 4%, partly due to Splunk's transition to a cloud subscription model, which is expected to weigh on results through the remainder of fiscal 2026. This uneven performance underscores the challenge for Cisco as it tries to balance growth in high-margin AI networking with legacy businesses.
Peer performance has been mixed. Hewlett Packard Enterprise (HPE) fell 1.53% on Monday, while Arista Networks (ANET) dropped 3.77% despite a broader market rally. In contrast, Fortinet (FTNT) and Palo Alto Networks (PANW) saw gains, with cybersecurity names outperforming. This divergence highlights that investors are selectively favoring companies with clear AI exposure and margin discipline over broader networking plays.
Looking ahead, bulls argue that Cisco's aging hardware is poised for a refresh cycle, driven by demand for its Silicon One chips, optics, and data-center switching. The company's pipeline for non-hyperscaler AI orders—from neocloud, sovereign, and enterprise clients—stands at over $2.5 billion, with $350 million already booked in Q2. However, bears caution that much of the upside may already be priced in. JPMorgan's price target of $96 sits below Monday's close, and the analyst consensus of $90.29 suggests limited upside without stronger evidence of AI order growth and margin stability.
Broader market conditions add another layer of complexity. U.S. equities ticked higher on Monday, driven by AI enthusiasm that pushed semiconductor stocks up 2.6%. However, futures slipped early Tuesday as the AI rally faded and traders braced for fresh inflation data. Polymarket contracts now show a 97% probability that the Federal Reserve will hold rates steady in June, with no rate cuts expected for the remainder of 2026. This means earnings, not monetary policy, will be the primary catalyst for tech stocks like Cisco.
As Wednesday's earnings approach, all eyes will be on Cisco's ability to deliver on its AI promises while managing margin pressures. The stock's near-record level leaves little room for error, and a strong report could fuel further gains, while any disappointment may trigger a sharp pullback.
