Cisco executives have been working overtime this week to make the case that Cisco stock is an AI investment vehicle for investors. Unfortunately, it hasn't worked.
At its annual Cisco Live conference in Las Vegas, Cisco announced a $1 billion AI investment fund that includes early investments in Cohere, Mistral AI, and Scale AI. The company also announced a technology partnership with Nvidia to launch a new AI infrastructure product, Nexus HyperFabric AI Cluster.
On the surface, it looked like Cisco was trying to grab attention in the overheated AI space. At best, these were public relations and investor relations stunts designed to capitalize on the AI bubble and draw more investors into Cisco stock.
The problem is, it didn't work. Cisco's stock barely budged during its biggest marketing event of the year, and Cisco's board and investors may have noticed.
Cisco's stock price has remained largely unchanged for five years.
This is starting to become a long-term problem for Cisco investors, as the company's stock price has underperformed in recent years. As analytics firm Trefis recently noted, the company's price-to-earnings multiples were 42% in 2021, -25% in 2022, and 6% in 2023. By comparison, the S&P 500's returns are 27% in 2021, -19% in 2022, and 24% in 2023, suggesting that Cisco is underperforming the S&P 500 in a tech bull market.
As one industry insider pointed out to me today, the investment announcement is reminiscent of Cisco's previous investments in cloud services that it later abandoned, such as Intercloud, which was announced in 2014 and coincidentally reached $1 billion, but never came to fruition.
Cisco Explores AI Stories
Cisco announced the AI Fund as part of a promotional spree at its annual Cisco Live event in Las Vegas this week, and putting AI at the forefront was naturally a priority: It's impossible to go to any tech conference these days without being bombarded with strong criticism of AI.
Cisco feels like they're reaching for the AI story. The problem with the funding announcement is that a $1 billion AI fund isn't enough to change the situation. The company's market cap is $186 billion, so a $1 billion investment is paltry compared to NVIDIA, which sells $60 billion of chips a quarter.
The reason the stock hasn't reacted yet is because Cisco has yet to prove it is a major player in AI. Investors are looking for product or revenue growth, or at least the potential for product and revenue growth. If you're a technology company, investors value you based on the value and growth of your product franchise. Cisco's product revenue growth has been in the low single digits for five years.
The big AI infrastructure players (Microsoft, Nvidia, Super Micro, etc.) have demonstrated a direct relationship between AI and revenue and are positioning themselves as AI leaders. These companies are powering billions of dollars of hardware, software, and services linked to AI technology. Cisco hasn't demonstrated that yet; it needs to demonstrate it with Splunk and Nexus HyperFabric AI. Investors are taking a wait-and-see approach for now.
Cisco also held an analyst day this week with news about AI: Cisco told analysts this week that it has $800 million in AI bookings for Silicon One, Ethernet switches and optical products.
Some Wall Street analysts are optimistic that Cisco can leverage assets such as its optical equipment and Silicon One hardware platform to succeed in its AI efforts.
“We believe it is advantageous for Cisco to be able to sell individual hyperscalers whatever they want, whether that be Cisco One Chip, grey box co-designed switches, or Cisco-branded switches,” wrote analyst Michael Genovese of Rosenblatt Securities after Cisco Analyst Day.
Cisco Live Announcements
There were other announcements at Cisco Live, including smart moves that benefit customers, such as improved integration between AppDynamics products and the newly acquired Splunk, but the main focus was on AI.
Cisco CEO Chuck Robbins jumped right into talking about AI during his opening keynote on Tuesday. “There's this thing called AI,” Robbins said. “I couldn't help but get up on stage and say AI seven times… What is AI?”
Robbins had some strong words to say about Cisco and AI: Unlike cloud, Cisco may have a big role to play in the next big technology boom. An AI fund would not only give Cisco an equity position, but it would also bring credibility and knowledge to the company.
“Every C-suite executive has been asking themselves, why aren't we adopting the cloud?” Robbins said during his keynote. “When it comes to AI, everyone is going to be leaning into the cloud. Everyone is going to want to know what our plan is. We want to do great things with AI, and we want to do it in a responsible way.”
As part of the investment announcement, Cisco said it would use its $1 billion global AI investment to “strengthen the startup ecosystem and expand the development of safe and reliable AI solutions.” Cisco has already committed approximately $200 million of the $1 billion investment fund to date.
The planned investments for the new AI fund are as follows:
- Adhesion: Headquartered in Toronto and San Francisco, Cohere offers security-focused large-scale language models (LLMs) and industry-leading Search Augmentation Generation (RAG) capabilities tailored to enterprise needs.
- Mistral AI: Mistral AI is one of the more recent GenAI companies, headquartered in Paris and founded by researchers from Meta and Google. The company is developing a new model of GenAI for the enterprise. Microsoft was an early investor in Mistral, which was valued at $2 billion as of December 2023. Other investors include Andreessen Horowitz and Lightspeed Venture Partners.
- Scaling AIUS-based Scale AI provides a data-centric, end-to-end platform for training and validating AI applications. Cisco recently participated in Scale AI's Series F funding as the largest strategic investor in the round.
Late to the party?
It's a bit surprising that Cisco has chosen to focus its AI investments, given the many product lines it has to manage and integrate. But it's not surprising. AI is everything these days, especially if you're a publicly traded tech company. You need to take risks, and you want to give investors a reason to buy your stock.
Cisco's management seems keen to show that it is part of the latest technology boom. So far, the company has not been seen by investors as an AI company. Since ChatGPT was launched in November 2022, Nvidia's stock price has risen 600% and Microsoft's stock price has risen 68%. Cisco's stock price has risen only 11%. Cisco has been left behind in the AI industry and is trying to get in through acquisitions.
Bottom line: Cisco is working hard to change the market's perception of its franchise, but it is still perceived as an enterprise networking company, despite efforts to strengthen areas such as security, cloud infrastructure, software, and AI.
(Disclosure: The author does not own any Cisco shares.)
