The AI Effect: A Canary in the Coal Mine for Tech’s Growth Metrics

Cisco Systems’ impressive stock performance has been attributed to booming demand for artificial intelligence infrastructure. However, a closer examination reveals that this narrative is only partially true.

The 64% return on investment for Cisco over the past year far surpasses the broader S&P 500, but when drilling down into revenue streams, AI-driven growth appears as a symptom of a larger trend. The real story lies in the resurgence of Cisco’s older businesses – switches, routers, and wireless solutions that have been steadily contributing to the company’s bottom line for years.

Campus networking product orders have increased by 20% year over year, with Wi-Fi 7 accounting for more than half of wireless orders in the latest quarter. This trend represents a significant shift in market demand for high-performance hardware. At its core lies an intriguing dynamic: pricing power.

Cisco’s decision to raise prices on certain products has yielded substantial revenue gains – 18% in the latest quarter, with an additional 5 percentage points attributed to these price hikes. The company must strike a delicate balance between passing on rising costs and maintaining customer relationships. Nevertheless, the outcome is clear: Cisco is flexing its pricing muscles like never before.

This raises important questions about the sustainability of this growth trajectory. Can Cisco continue to deliver double-digit revenue growth while managing prices and margins? The company’s guidance for fiscal 2027 suggests it aims high, with a projected revenue increase of around 15%. However, when excluding the AI-driven segment, the rest of the business is expected to grow at a more modest pace – approximately 10%.

This trend has significant implications. For one, it challenges conventional wisdom that AI infrastructure drives growth in tech. While hyperscalers are indeed purchasing AI-enabled solutions, the real story lies in the broader market’s appetite for high-performance hardware. This development has substantial implications for companies like Cisco, which must balance investment in AI research and development with maintaining pricing power.

Another implication is more nuanced – one that speaks to the nature of tech growth metrics themselves. The narrative surrounding AI-driven disruption has led us to neglect tried-and-true methods that have propelled companies like Cisco to success for years. This serves as a reminder that, in the world of tech, growth often results from a delicate balance between innovation and incrementalism – not some grand, revolutionary leap.

As investors and analysts continue to focus on AI’s role in driving growth, it is worth remembering that the real story lies beneath the surface. Cisco’s resurgence is a testament to the enduring power of traditional tech – and a warning sign that we may be overlooking fundamental drivers of growth in this sector.