Cisco Systems, Inc. (NASDAQ:CSCO), included in Insider Monkey’s 10 Best Pick and Shovel AI Stocks to Buy for the Long Term, has another way to benefit from AI investment: helping customers control their operating costs. Agents can repeatedly call models and retry tasks, creating unpredictable bills. Monitoring that waste could support lasting software demand.
Cisco Systems, Inc. has a forward P/E of 20x and a trailing P/E of 32x. Trailing P/E uses earnings from the past twelve months; forward P/E uses forecast earnings. Arista Networks, Inc. (NYSE:ANET) has a forward P/E of 39x. Its latest quarterly GAAP operating margin was 45%, versus 25% here, supporting a premium. The lower valuation looks reasonable if earnings growth becomes dependable cash generation.
For Cisco Systems, Inc., the midpoint of management’s separate fiscal 2027 adjusted EPS guidance of $5.05–$5.11 implies approximately 17% growth from $4.33 in fiscal 2026. Networking revenue grew 22%, supporting the outlook. Fiscal 2026 GAAP EPS was $3.33; adjustments included stock compensation, acquisition amortization, and restructuring. Reported earnings also benefited from investment gains excluded from management’s adjusted results. These accounting effects are separate from expected operating growth. Software deserves valuation weight when recurring relationships produce cash after reinvestment.
AI Complexity Creates a Monitoring Problem
Cisco Systems, Inc. has added Tokenomics capabilities to Splunk Agent Observability, connecting AI usage and spending with agent performance. Customers can identify expensive workflows and compare model cost with quality. Switching routine tasks to cheaper models could reduce bills while preserving useful output. Monitoring remains necessary as applications and models change.
Cisco Systems, Inc. can bring network information into those investigations and sell through established enterprise relationships. Integrating monitoring into operating routines could lower selling costs and support renewals. The commercial test is whether AI adoption expands recurring customer spending.
Cisco Systems, Inc. still has work to do. Fiscal 2026 software revenue rose 4% to $23.2 billion, while total subscription revenue increased just 1%. Observability revenue also grew 4%, but network assurance supplied the growth while the observability suite declined. New monitoring features need to reverse that decline before they can change the earnings mix.
Customers Must Save More Than They Pay
Cisco Systems, Inc. prices Agent Observability around spans, which record individual workflow operations, with included evaluation capacity and optional additional resources. Cheaper models can lower customers’ token bills without reducing monitored activity. Eliminating unnecessary workflow steps, however, could constrain billable usage. Expanding coverage and retaining customers must compensate. Customers should measure savings after monitoring fees and integration work, while preserving task quality.
Dynatrace, Inc. (NYSE:DT), with a forward P/E of 30x, offers competing AI cost and performance tools. Its predominantly subscription-based business helps explain its premium. Collecting, storing and evaluating more data also costs money. Higher monitoring volumes create value only if subscription revenue grows faster than delivery and development costs.
Cisco Systems, Inc. generated $12.8 billion of fiscal 2026 free cash flow, down 4%, after deducting capital spending from operating cash flow. Higher capital spending and a final $2.3 billion transition-tax payment weighed on cash generation. Inventory absorbed $2.54 billion, while financing receivables absorbed $1.84 billion across the business. Equipment supply and customer financing tie up cash before collections arrive.
Inventory purchase commitments reached $17.17 billion, versus $7.60 billion, reflecting hyperscaler demand and higher memory prices. Supplying AI infrastructure requires more upfront investment. Delayed shipments could postpone collections; weaker demand could leave expensive components unused and force write-downs that reduce margins. Year-end debt was $29.5 billion, against $15.9 billion of cash and investments. Shareholders need software growth that strengthens cash conversion.
Conclusion
Cisco Systems, Inc. looks fairly valued at 20x forward earnings. Helping customers spend less on AI can become profitable recurring business when savings support renewals and broader adoption. Sustaining the valuation requires delivery of the earnings outlook, stronger subscription growth, and cash conversion after investment. A higher software premium needs improving monitoring revenue and margins; useful dashboards alone will not earn it.
While we acknowledge the risk and potential of CSCO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CSCO and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: Hewlett Packard (HPE) Reported $12.2B of Revenue and $1.0B of Free Cash Flow. Can Networking Margins Offset the Inventory Build? and SailPoint (SAIL) Reaches $1.2 Billion ARR. Can AI Growth Lift Revenue and Cash Flow?
This article is originally published at Insider Monkey.
Hedge Fund Resource Center