Cisco Stock Tumbles 10% on Stalled Profit Growth
💡 Key Takeaway
Cisco's stock dropped despite revenue growth because profit margins are shrinking due to rising memory costs.
What Happened: A Strong Quarter with a Weak Outlook
Cisco Systems reported its fiscal Q2 2026 earnings, and on the surface, the numbers looked strong. The company beat analyst expectations, posting adjusted earnings of $1.04 per share on sales of $15.3 billion. This revenue figure set a new quarterly record for the company, growing 10% year-over-year.
Product orders were a particular bright spot, surging 18% and indicating robust demand across all its markets and geographies. This suggests that the company's core business is healthy and that future sales should remain strong.
Looking ahead, Cisco provided guidance for the next quarter, forecasting sales of approximately $15.5 billion. For the full year, it expects revenue to reach about $61.5 billion, signaling continued top-line growth.
However, the market's reaction was sharply negative, with the stock falling nearly 10%. The problem wasn't the revenue; it was the profit outlook that spooked investors.
Why It Matters: Profit Growth Has Stalled
For investors, revenue growth is important, but profit growth is what ultimately drives a stock's value. While Cisco's sales are climbing, its profits are not keeping pace. The company forecasted that its Q3 GAAP earnings would decline sequentially to around $0.75 per share.
More importantly, full-year GAAP earnings are projected to be flat, landing between $3.00 and $3.08 per share. This means that after a strong first half, profit growth has effectively stalled for the remainder of the fiscal year.
The primary culprit is rising costs, specifically for computer memory. These increased expenses are squeezing Cisco's profit margins, meaning the company is making less money on each dollar of sales than investors had hoped.
With the stock trading at over 25 times earnings, a high multiple for a mature tech company, the lack of profit growth makes the current valuation difficult to justify. Investors are paying a premium for a company that isn't growing its bottom line.
Source: The Motley Fool
Analysis generated by Bobby AI quantitative model, reviewed and edited by our research team. This is not financial advice. Always do your own research before making investment decisions.
Bobby Insight
Avoid CSCO until there are clear signs of margin recovery and profit growth.
The combination of rising costs, flat earnings guidance, and a rich valuation creates significant near-term headwinds. While the business is healthy, the stock is unlikely to rally until profitability improves.
What This Means for Me
