Cisco (CSCO)

Networking technology giant Cisco (NASDAQ:CSCO) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 7.5% year on year to $14.88 billion. Guidance for next quarter’s revenue was optimistic at $15.1 billion at the midpoint, 3% above analysts’ estimates. Its non-GAAP profit of $1 per share was 1.9% above analysts’ consensus estimates.

Company Overview

Founded in 1984 by a husband and wife team who wanted computers at Stanford to talk to computers at UC Berkeley, Cisco (NASDAQ:CSCO) designs and sells networking equipment, security solutions, and collaboration tools that help businesses connect their systems and secure their digital operations.

The Enterprise Networking subsector is poised for growth as businesses accelerate cloud adoption, AI-driven network automation, and edge computing deployments. While these seem like big, nebulous trends, they require very real products and services like switches, firewalls, and datacenter hosting services. On the other hand, challenges on the horizon include intensifying competition from cloud-native networking providers, regulatory scrutiny over data privacy and cybersecurity, and potential supply chain constraints for networking hardware. While AI and automation will enhance network efficiency and security, they also introduce risks related to algorithmic bias, compliance complexity, and increased energy consumption.

Cisco competes with networking equipment providers like Juniper Networks (NYSE:JNPR), Arista Networks (NYSE:ANET), and Huawei; security vendors such as Palo Alto Networks (NASDAQ:PANW), Fortinet (NASDAQ:FTNT), and CrowdStrike (NASDAQ:CRWD); and collaboration tool makers including Microsoft (NASDAQ:MSFT) with Teams and Zoom (NASDAQ:ZM).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $57.7 billion in revenue over the past 12 months, Cisco is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because finding new avenues for growth becomes difficult when you already have a substantial market presence. To accelerate sales, Cisco likely needs to optimize its pricing or lean into new offerings and international expansion.

As you can see below, Cisco’s 3.7% annualized revenue growth over the last five years was tepid. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Cisco’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Cisco reported year-on-year revenue growth of 7.5%, and its $14.88 billion of revenue exceeded Wall Street’s estimates by 0.8%. Company management is currently guiding for a 7.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.4% over the next 12 months. While this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Cisco has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average operating margin of 24.6%.

Looking at the trend in its profitability, Cisco’s operating margin decreased by 4.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Cisco generated an operating margin profit margin of 22.6%, up 5.6 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Cisco’s unimpressive 4.5% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Cisco’s two-year annual EPS declines of 2.9% were bad and lower than its flat revenue.

We can take a deeper look into Cisco’s earnings to better understand the drivers of its performance. While we mentioned earlier that Cisco’s operating margin expanded this quarter, a two-year view shows its margin has declined. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Cisco reported adjusted EPS of $1, up from $0.91 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects Cisco’s full-year EPS of $3.89 to grow 5.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Cisco has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 25.4% over the last five years.

Taking a step back, we can see that Cisco’s margin dropped by 5.8 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Cisco’s free cash flow clocked in at $2.89 billion in Q3, equivalent to a 19.4% margin. The company’s cash profitability regressed as it was 5.5 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Cisco hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 30.8%, splendid for a business services business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Cisco’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Cisco reported $15.74 billion of cash and $28.09 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $21.82 billion of EBITDA over the last 12 months, we view Cisco’s 0.6× net-debt-to-EBITDA ratio as safe. We also see its $432 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Cisco’s optimistic revenue guidance for next quarter, which blew past analysts’ expectations. We were also glad its EPS guidance for next quarter outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 5% to $77.67 immediately following the results.

Updated: December 3, 2025 at 11:08 PM EST

Before deciding whether to buy Cisco or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Cisco isn’t a terrible business, but it doesn’t pass our bar. For starters, its revenue growth was uninspiring over the last five years. And while its scale makes it a trusted partner with negotiating leverage, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its cash profitability fell over the last five years.

Cisco’s P/E ratio based on the next 12 months is 18.3x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $84.81 on the company (compared to the current share price of $77.87).