Cisco Systems Inc

Cisco is positioned to benefit from the accelerating adoption of agentic AI, which is driving a networking supercycle. As customers seek to manage increasing traffic and costs, they are investing in Cisco’s Networking stack for inferencing across various environments. Additionally, the rise of agentic AI is expanding the threat landscape, increasing demand for Cisco's security and observability solutions. This presents a unique opportunity for Cisco, indicating that we are only at the beginning of this supercycle.

Cisco is positioned to benefit from the accelerating adoption of agentic AI, which is fueling a networking supercycle. As customers face increasing traffic and costs, they are investing in Cisco’s Networking stack for inferencing across various environments. Additionally, the rise of agentic AI is expanding the threat landscape, driving demand for Cisco's security and observability solutions. This presents a unique opportunity for Cisco, indicating that we are only at the beginning of this supercycle.

Cisco, the largest maker of networking equipment, also performed very strongly during the quarter. The stock rallied 17% in one day, its best day in more than 14 years, after the company reported strong sales growth and a better-than-anticipated sales forecast on accelerating data centre orders. Growth was broad-based, with enterprise networking refresh activity accelerating alongside AI infrastructure demand, and revenue is now on track for double-digit annual growth for the first time since fiscal 2023. Additionally, the firm announced plans to reduce its workforce and reallocate resources towards AI, silicon and optics. Chief executive Chuck Robbins described the current environment as a 'networking supercycle'.

Cisco Systems was the dominant provider of networking equipment – the ultimate picks-and-shovels play on the internet build-out. Cisco’s franchise has proven far more durable than Sun’s because switching costs in enterprise networking are severe. Its shares peaked at 26 times revenue in March 2000 when it briefly became the world’s most valuable publicly traded company. Over the subsequent two years, shares fell 90%. There was no fraud, no accounting irregularities, and the need for internet networking equipment continued to grow. The shares were simply overpriced, and they did not regain their peak price for 25 years despite the company having tripled in size.

Cisco has shown strong demand in the artificial intelligence infrastructure sector, nearly doubling its full-year outlook for AI infrastructure orders from approximately $5 billion to $9 billion. This significant increase in demand highlights Cisco's strategic position in the market and its ability to capitalize on the growing need for data center buildouts and electrical infrastructure. The Fund's investment in Cisco reflects confidence in its long-term growth potential and the quality of its business model.

Cisco Systems has shown a strong performance with a 52.5% increase in share price and a 30.1% growth in dividend yield. The company is recognized for its enterprise networking and cloud computing products and services, which are essential in today's technology landscape. The fund maintains exposure to Cisco Systems due to its resilient business model and strong capital structure, indicating confidence in its ability to deliver consistent returns and support multi-year dividend growth.

Cisco was among the portfolio’s strongest contributors as demand for AI-related infrastructure remained robust. The company benefits from continued investment in AI infrastructure, which positions it well in the current market environment. The overall strength of the portfolio’s underlying holdings, including Cisco, reflects a positive outlook for companies in the networking sector that are capitalizing on the AI trend.

Cisco Systems, Inc. (CSCO) advanced as AI infrastructure demand accelerated and the campus networking refresh cycle gained momentum. Strong AI infrastructure orders and improving enterprise demand supported a positive shift in investor sentiment. We believe CSCO’s large installed base and growing AI networking opportunity position the company for continued earnings growth.

Cisco is mentioned in the context of market valuations, with a comparison to the dot-com bubble. The letter discusses how select stocks today trade at multiples exceeding those of Cisco at the peak of the dot-com bubble, indicating a concern about current market valuations rather than a specific investment thesis on Cisco itself.

We added to Cisco Systems, reflecting improving conviction in their respective wealth creation outlooks and attractive valuation support. The manager believes that Cisco Systems is well-positioned to benefit from the ongoing trends in AI and technology, which are expected to drive long-term growth and value creation.