Cisco & Cerebras Orders up, Stocks Down

**Tyler Crowe** (0:03)
The wild ups and downs of earnings season continues. Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Jon Quast and Matt Frankel. Guys, it has been a wild up and down of the second quarter. Look, we could go into the several reasons, and maybe once the earnings season dies down, we'll really do a postmortem of them, why this seems to be happening more with the AI trade recently and the volatility of the recent stock market. But we're a little busy with earnings right now. We had a couple big earnings reports. We had Cisco, we had Cerebras, which is a new IPO, a lot of investor excitement around that. And then we really dug into some under-the-radar stocks, doing a little bit of a lightning round, letting us indulge our analyst tendencies a little bit here. But let's start with Cisco. Shares of Cisco are down 7.4 percent as we record. And considering the moves we've seen so far in the second quarter, that's actually a rather mild reaction for the stock. And as with anything that's selling equipment to data centers and AI, sales growth looks great, but it seems as though the fly in the soup was related to service revenue, which came in a little lower than expected. So Matt, start with you. What stood out in the report?

**Matt Frankel** (1:23)
Yeah. So about 85 percent of the companies in S&P 500 have beat earnings expectations this quarter. It begs the question, why do we have earnings expectations at this point? But an earnings beat alone isn't enough to move the needle, it seems, this quarter. Even a beaten raise is not enough to move the needle here. Cisco itself has now beaten earnings estimates for the past five quarters in a row. So it's kind of just expected at this point.
I mean, the AI story was impressive. The latest guidance, which was already revised upwards several times, was calling for about $9 billion in AI orders this year.
And Cisco produced $9.3 billion. But honestly, that's not as impressive of a beat as we've seen Cisco make in recent quarters. Remember, their original guidance was for $5 billion. They beat that through three quarters. That was an impressive beat. So maybe the market's starting to think that the growth is appropriately priced in. Future revenue growth could be a lot stronger than the numbers suggest. Cisco's product orders in Q4 grew by 35% year over year, compared with just an 18% revenue growth rate. That implies we might see an acceleration coming up. Notably though, management didn't provide new guidance for that AI order number. I was certainly looking for that for the 2027 fiscal year, and I have to believe many investors were as well. Even after today's reaction, Cisco is trading for about 40 times earnings, and it's still within a few percentage points of its all-time high.
So it seems like the beaten raise, it just simply didn't live up to expectations. I mean, all in all, a very solid quarter.

**Jon Quast** (2:54)
Yeah. What decade is it? I mean, Cisco, Cisco, this is incredible revenue growth, and it's not just revenue growth that stood out for me, Tyler. It's also the earnings growth. So we did have the 12% top-line growth for the whole year, but you look at the earnings per share growth, that's profit minus the share count, divided over the share count, 31% growth for earnings per share.
That is a good sign when earnings per share are growing faster than revenue. And then for the upcoming year, also expecting maybe 16% revenue growth, so a slight acceleration into the coming year, but then also that earnings per share growth, once again, projecting better than 20% growth for the earnings in the upcoming year. So yes, Matt is right. It is trading at a premium valuation at 37 times earnings. That said, the top-line growth is great. The profit growth is even better, and the strong demand that it is seeing certainly helps with that profitability. So that's what stood out to me.

**Tyler Crowe** (3:55)
For what it's worth, forward estimates have it at about a price to earnings of about 26 But as Matt said, everyone's beating expectations all the time. So maybe that's even sandbagging a little bit here, doing the dog and pony show of earnings, expectations, and all that stuff. Now, look, the stock is down. So I did try to dig in and be like, well, why is that, like everything you guys mentioned all seems pretty good. And something that stood out was remaining performance obligations. I mean, RPOs, if you want to use cool kid jargon, it grew about 7% in the most recent quarter. And compared to other like hardware and software companies, that is rather light. As much as there is demand, and it is incredibly fierce demand, at the same time, competition in this industry is getting stronger, as well as new technologies are coming out, that could somewhat displace a little bit of what Cisco may be doing. So my question to you guys was, seeing those RPO numbers maybe being a little bit more tepid, is this a case where Cisco may be losing shares to the Arista networks, or someone else in this industry that I might not be considering here?