Cisco Systems shares fell Wednesday evening despite the networking company delivering a beat and raise. The results were solid but not enough with the stock trading at record highs and at a premium to its historical valuation — something we warned created a tricky backdrop for the report. Revenue in the company’s fiscal 2026 second quarter increased 10% year over year to $15.35 billion, exceeding the LSEG-complied analyst consensus estimate of $15.12 billion. Adjusted earnings per share (EPS) increased 11% on an annual basis to $1.04, beating expectations of $1.02, LSEG data showed. Shares dropped about 7% in extended trading Wednesday, giving back most of its year-to-date gains. Heading into the quarter, Cisco had bucked the broader pullback in technology stocks and traded at all-time highs this week. Still, we had some reservations about the stock heading into the print, which motivated our profit-taking on Tuesday. We never like to see a stock down this much in after-hours trading, but that sale will make this decline a little more manageable. CSCO 1Y mountain Cisco Systems’ stock performance over the past 12 months. Bottom line It can be confusing to see a stock drop this much on what looks like a great quarter on paper, with Cisco beating Wall Street expectations and raising its full-year outlook. There’s no doubt Cisco is seeing plenty of demand for its products. Another quarter of accelerating product order growth is a clear sign of momentum. The company is seeing a flood of orders from hyperscale customers and also at the enterprise level. When we analyze Cisco, we always focus on orders because that’s the best leading indicator of where revenue is headed. However, the quarter did not come without drawbacks. First is the impact of higher memory prices, which ate into gross margins. Cisco’s hardware uses all types of memory, and unfortunately, a global memory shortage has caused prices to skyrocket. It’s a big reason why Micron is one of the biggest gainers in the market over the past year. CEO Chuck Robbins addressed memory prices on the earnings call, pointing out that the company is taking several proactive measures to mitigate this impact, including raising prices on its own products and revising contractual terms with channel partners and customers. Cisco’s massive scale should lead to favorable terms when it’s time to negotiate. Still, no one quite knows when memory prices will top out, or at least slow their surge. Another issue — and this has become a smaller problem given the strength in the AI story — was the ongoing weakness in its Security segment. Management keeps promising that it will get better thanks to strong growth in its newer and refreshed products, but it hasn’t fully translated yet. This is a more modest headwind given Security’s smaller scale compared with Networking — at roughly $2 billion in quarterly revenue versus $8.29 billion — but it’s still meaningful. One more issue Cisco faced heading into Wednesday’s print was its premium valuation relative to history. We’ve long known Cisco as a stock that fetches a mid-teen to high teen price-to-earnings multiple, but it’s significantly re-rated to about 20 times forward earnings as investors got bullish about the AI opportunity. We don’t think the re-rating opportunity here is dead because of the order momentum, but this earnings report served as a test of what multiple investors were willing to pay for the stock. Again, we flagged these problems when we trimmed the position on Tuesday at around $87 per share. But the bottom line is Cisco’s role in the AI infrastructure buildout has evolved from a nascent effort into a multibillion-dollar annual business that should continue to grow through its strong relationship with fellow Club name Nvidia and the introduction of new products. That includes the Silicon One G300 it announced on Tuesday, which isn’t in the $5 billion hyperscale order target for this fiscal year. We’re reiterating our hold-equivalent 2 rating to give the stock some room on this pullback from record highs, but we are nudging up our price target to $90 from $85 as earnings should continue to grow nicely despite rising memory prices. Commentary Total Product orders increased 18% year over year – an acceleration from 13% growth in the prior quarter – with growth across all geographies and customer markets. Cisco is receiving a ton of orders from hyperscalers as they build out their data centers, but even without their contribution, product orders were up 10%. Within Products, Networking revenue increased 21% to $8.3 billion, handily beating estimates of $7.9 billion. Networking order growth accelerated to more than 20% year over year, representing the sixth consecutive quarter of double-digit growth. AI infrastructure orders for Cisco’s Silicon One systems and optical transceivers by hyperscale customers continued to pour in. It booked $2.1 billion of orders in the quarter, up from $1.3 billion in the prior quarter and more than $800 million two quarters ago. Given the demand it is seeing, the company now expects AI orders from hyperscalers to be more than $5 billion this fiscal year – up from the prior target of $3 billion with revenue recognition of over $3 billion. Beyond hyperscaler customers, Robbins continues to point to growing opportunities with so-called neoclouds (think a CoreWeave), sovereign entities, and enterprise customers. Also within the Networking division, Cisco is seeing big gains in its campus networking portfolio, driven by strong demand for its next-generation switching, routing, and wireless products. In the Security division, revenue fell 4% year over year and missed analysts’ forecasts for the fourth quarter in a row, according to FactSet data. We’re not surprised by the disappointing outcome – we’ve called out weakness in Security for several quarters now. As mentioned, the company noted that it saw order growth across its new and refreshed products, which collectively make up about one third of the portfolio. But what that means is that the legacy business is a drag. Additionally, Splunk — a major acquisition that closed in March 2024 — is going through a transition of offering more cloud subscriptions and fewer on-premise deals, which is creating some time differences on when revenue gets recognized. The trade-off here is a short-term drag on revenue growth for more sticky relationships and opportunities for expansion. The Collaboration and Observability units saw revenue growth of 6% and flat, respectively. Collaboration — home to its Webex suite and call center software solution — beat estimates, while Observability missed expectations. Its smallest unit by revenue, Observability is home to its software businesses that monitor web traffic to detect and troubleshoot problems such as t he 2017 acquisition of AppDynamics . Finally, Services revenue declined 1% year over year to $3.7 billion, missing estimates. During the quarter, Cisco repurchased 18 million shares at an average price of $76.29 for $1.4 billion. With the stock around $80 per share even when factoring the extended trading decline, the buyback looks to be money well spent. The company has $10.8 billion remaining under its authorization. Cisco also raised its quarterly dividend by a penny per share to 42 cents. The yield sits at around 2%. Guidance Cisco expects fiscal 2026 third-quarter revenue of $15.4 billion to $15.6 billion, which is above the consensus estimate of $15.19 billion. It also sees non-GAAP EPS of $1.02 to $1.04 cents, which is in line with the consensus forecast of $1.03. The revenue guide looks good, but the market may not like this because it’s not translating into a larger EPS number, with one factor being higher memory prices hurting margins. For full year 2026, Cisco raised its revenue outlook by $1 billion at the low end of the range and $700 million at the top end. The company now expects revenues of $61.2 billion to $61.7 billion, which at a midpoint of $61.45 billion is above the consensus estimate of $60.76 billion. On the bottom line, management raised its EPS forecast to the range of $4.13 to $4.17 from its prior outlook of $4.08 to $4.14. This new midpoint of $4.15 is two pennies better than the consensus forecast. It also makes the implied fourth-quarter guide $1.08 versus the consensus forecast of $1.07. (Jim Cramer’s Charitable Trust is long CSCO. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.