Cisco surges 32% as AI networking trade shifts from Arista

The AI networking trade has flipped in a month, with Cisco overtaking Arista as the market's preferred bet on data center infrastructure.

Cisco Systems Inc. has surged 32% over the past month, while Arista Networks Inc. fell 10% and Broadcom Inc. drifted sideways — a sharp reversal in the AI networking trade that favors the legacy incumbent over the pure-play challenger.

"Cisco delivered record quarterly revenue in Q3 and we saw very strong, broad-based demand for our products, demonstrating the relevance of our technology for connecting and securing AI," Chief Executive Officer Chuck Robbins said.

Cisco reported $15.84 billion in fiscal Q3 revenue, up 12% year over year, with networking revenue climbing 25%. The company raised its FY2026 AI infrastructure order target to $9 billion from $5 billion and lifted its AI revenue guide to $4 billion from $3 billion. Data center switching orders grew more than 40% year over year, validating the Silicon One platform strategy. By contrast, Arista guided Q1 2026 non-GAAP gross margins to 62% to 63%, a step-down that analysts flagged as a margin-compression risk.

The rotation matters because all three names are exposed to the same hyperscaler capital expenditure cycle — Meta Platforms Inc. and Microsoft Corp. are major customers for both Cisco and Arista. Yet over the past month, the market has chosen the incumbent. Cisco shares now trade at a higher valuation multiple than before the earnings report, while Arista's 75% one-year gain has been partially erased by the 10% monthly decline. The question for investors is whether Cisco's momentum carries through the quarter or whether mean reversion brings Arista back into the lead.

What Drove the Rotation

Cisco's beat-and-raise quarter forced analysts to reset expectations. At least 11 firms — including HSBC, UBS, Morgan Stanley, Bank of America, Goldman Sachs, and JPMorgan — lifted price targets after the report. HSBC pointed to management's expectation for at least $6 billion in FY2027 AI revenue as a key support. Rosenblatt, UBS, and Morgan Stanley highlighted AI-driven networking demand and hyperscaler relationships, with analysts citing order strength and a path to maintaining operating margins around the mid-30% area.

The bear case has not disappeared. Goldman Sachs and Piper Sandler kept Neutral ratings despite higher targets, flagging rich valuation and ongoing security-related headwinds. Wells Fargo described becoming more sensitive to Cisco's price-to-earnings level. Insider selling has also accelerated — Robbins sold 15,746 shares at $96.57 on May 10, and six other senior executives sold shares the same day.

Arista's Margin Squeeze vs. Broadcom's Steady Ascent

Arista's 10% decline reflects investor concern about customer concentration and margin pressure. The company's 62% to 63% non-GAAP gross margin guidance for Q1 2026 represents a step-down from prior levels, and its reliance on Meta and Microsoft for a significant portion of revenue remains an overhang. Chief Executive Officer Jayshree Ullal said 2025 was "the year of validation of our Arista 2.0 momentum," as the company shipped a cumulative 150 million ports, but the margin trajectory has given investors pause.

Broadcom's flat one-month performance looks like digestion after a massive run. The company's Q1 FY2026 AI semiconductor revenue hit $8.4 billion, up 106% year over year, and management guided Q2 AI semi revenue to $10.7 billion. Chief Executive Officer Hock Tan said AI revenue growth is accelerating. Broadcom supplies silicon to both Cisco and Arista, so its movement tends to track broader semiconductor sentiment rather than networking-specific events. The stock is up 85% over the past year.

Over a one-year frame, the dispersion narrows considerably. Cisco leads at 86%, followed by Broadcom at 85%, then Arista at 75%. The "clear winner" narrative reflects a recent observation rather than a settled verdict. Today's partial intraday reversal — Arista bouncing 3% to 4%, Cisco down 2.5%, Broadcom up 2% — shows how fast leadership can shift inside the AI networking complex.

For investors, the key question is whether Cisco's momentum is sustainable. The company's $9 billion AI order target, $1.3 billion in share repurchases during the quarter, and $0.42 quarterly dividend provide a capital-return cushion. But gross margins are compressing — Q4 FY2026 guidance of 65.5% to 66.5% is down from 68.4% a few quarters ago — as AI hardware mix dilutes profitability. Management also announced restructuring charges of up to $1 billion, a familiar cost-cutting playbook to flatter earnings per share.

This article is for informational purposes only and does not constitute investment advice.