AI Is Supplying Blowout Earnings Again

In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributors Tyler Crowe, Matt Frankel, and Jon Quast discuss:

• Cisco’s blowout earnings.
• What to do when a cyclical company has a new catalyst.
• Lumentem’s even more impressive earnings.
• Can a company with such a high valuation be worth it?
• Mailbag: What are some non-AI stock ideas for portfolio diversification?

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A full transcript is below.

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This podcast was recorded on May 14, 2026.

Tyler Crowe: We're talking earnings and investor questions on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors, Matt Frankel and Jon Quast. Today, we're getting lots of questions from members, and we thought this would be a really good time to combine some listener questions as well as earnings reports that we've seen coming out in the past couple of days, as a little bit of a marriage of good ideas. We're going to talk about Cisco's earnings. We're going to talk about Lumentum's earnings, and also we'll get into, hey, maybe we should talk about non-AI things for a little bit from our investor mailbag.

But as I said, we're going to start with Cisco. We got a question a little while ago from one of our listeners. I hope I get the name right, Halish Shankar, and was asking about Cisco and what are our thoughts on it. I thought it would be a great time to start the conversation today because Cisco reported earnings, and the stock is up 13.8% as we were recording because numbers were pretty good. Revenue growth was up about 12% for the year earnings was up, and obviously guidance was looking pretty good. Jon, why don't you run us through the numbers and what you guys saw in this particular earnings that I would say defied expectations of what Cisco has been for a while.

Jon Quast: It's so surprising to be talking about Cisco, one of the poster children of the dot-com bubble over 20 years ago, but really, the business is booming unlike ever before. You look at the most recent quarter, 12% top-line growth. Really, all of the growth is coming from one part of the business. Cisco has various components, but there's one part of the business that's driving everything, and that is networking. The company reported 25% year-over-year growth in the networking side of the business. Everything else is either down or basically flat.

Essentially what is happening here? As the AI infrastructure build-out marches on, all of these GPUs, the clusters, even the data centers themselves need to be connected, and this really plays to Cisco's strengths. It's getting a ton of demand, in particular, from the hyperscaler businesses. You think of the public cloud giants, the tech giants, the Magnificent Seven, these are the companies that are needing network solutions, such as the ones that Cisco provides. What is fascinating here, when you look at the orders to the hyperscalers last fiscal year, about two billion total for Cisco. Going into this fiscal year, it was expecting five billion total, and that was quite ambitious of a projection, more than doubling year over year. But we're three quarters into its fiscal year now, we're already surpassed that projection, and now management is saying, we're expecting nine billion of orders in this fiscal year from the hyperscalers. Incredible year-over-year growth there.

It's not just hyperscalers, it's also the neo-Cloud businesses. We just got report from Nebius today signed a $27 billion deal with Meta. Its business is growing like crazy. It needs networking solutions as well, but all in all, good quarter for Cisco.

Matt Frankel: Yeah, I wanted to lean into something Jon just mentioned and emphasize the word orders. Product orders to hyperscalers are growing at a triple-digit rate. AI infrastructure orders from hyperscalers were $1.9 billion in the third fiscal quarter. That's up from 600 million a year ago, so more than tripling. Overall, Cisco's orders were up by 35%. Jon mentioned the top line only grew by 12% in the quarter, but overall product orders, which are very indicative of future revenue, were up 35%. Even excluding hyperscalers were up 19%, we're seeing really strong demand across the business. Networking orders were up 50% year over year, as Jon mentioned, that was the strongest segment, and hyperscalers are the real story here.

Just to put this in perspective, Jon correctly mentioned that now Cisco expects $9 billion in orders this fiscal year for AI infrastructure. That's compared to just $4 billion in expected recognized AI revenue. More than double what they're recognizing in AI infrastructure revenue, they're expecting for future revenue because they're getting these orders in. This is really just a long way to say that the reaction to Cisco's quarter isn't necessarily about revenue. No one's that excited about 12% year over year top line growth or the earnings that they just reported on a per-share basis. It's as much about the orders it now has on its books that will be recognized in the future periods, and the anticipated acceleration in that number over time.

Tyler Crowe: Getting back to the question that our listener Halish asked related to, it's like, is this a good idea? This is one of the things I've been struggling with Cisco, and we'll get into it when we talk about Lumentum in the next section, as well, is that these are businesses that have been notoriously cyclical for pretty much all of their life as publicly traded companies. Cisco, like to Jon's point, was the poster child of massive build-out during the dot-com boom. If everybody had to have Cisco systems equipment, and then everyone was like, maybe we don't. Maybe we can use other stuff, and it was OK. It took decades for investors to see the highs of Cisco stock again. Looking back over the past 10 years, revenue has been up and down. Operating cash flow for this company is more or less what it was 10 years ago, and so this is where it's been a little bit of a struggle for me. The company is doing much better right now, but is this just a short-term catalyst of a typically cyclical business? Or is this something that's fundamentally different about the business, and we as investors should look at it differently?

Matt Frankel: Yeah, Cisco is at an all-time high after this earnings report. It's nearly doubled over the past year. The AI business has nearly doubled their expectations, as well. I would argue that not only is it a move that's justified, but this is a fundamentally different time. This isn't just cyclicality right now. I don't think we've seen an AI cycle over the past couple of decades. This is something that's new. It's something that wasn't really a big market opportunity. No one was talking about AI infrastructure a few years ago. Shares trade for about 26 times forward earnings right now. There's a solid case to be made that revenue growth will accelerate in the 2027 fiscal year, which starts very soon. I'd actually be comfortable opening a small position in Cisco at this level, even at an all-time high, and then adding incrementally. That's just my take on it.

Jon Quast: For me, Cisco just bores me. I'm sorry to all the Cisco shareholders out there. I just want to be honest about that up front. I wanted to just move on from this. However, given the question, I really took a honest, hard look at it, and I think I need to agree with Matt here that there may be a case for owning Cisco stock here at this price. Listen, it's still quite the value compared to some of its competitors in the space. Growth is accelerating. We look at the next quarter's projections, projecting 19% growth up from what was it 12-13 this quarter. That's an acceleration, that's a good thing. Operating margin recently went from 23%-25%. That's a good thing. You look at what Cisco's products it provides, it does seem like they are starting to take some market share here and if that continues, I don't think this is a terrible stock today.

Now, I think that I would still prefer Arista Networks, that's ANET, for its debt-free balance sheet. I like nice clean balance sheets, especially in the face of uncertainty. Cisco's isn't as clean as that, but I don't think it's crazy to own Cisco stock here. Hearing both your response and thinking about it myself, I've always looked at it in the same sense of these are all how bullish are you on AI build-out? You can look at the rates of spending and all the studies that are going out related to this. If you are a wholesale believer in what is being published and what is being projected for AI spending, then absolutely, these are 4-, 5-, 6-year catalysts that are going to be hard to avoid as investors; it all comes down to how much you believe it. We've discussed it many times a year before, and I feel bad like a broken record saying it all over again. But it really does come down to how much of a believer in this AI infrastructure build-out you are. Coming up next, we're going to even talk more about this with earnings related to Lumentum.

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Jon Quast: Similar to the stock move that we saw with Cisco earlier today, shares of Lumentum were up as high as 21% on recent earnings reports. This is a company that we got a question about from one of our listeners, Nathan Holtstein. It's also a prominent member of several scorecards on the Hidden Gem side of various Motley Fool Investing Services. It's been recommended a couple of times by CEO Tom Gardner and some of the other in some of our recommendations services. It is something that's probably on a lot of investors' minds today. We want to get into earnings and try to get to Nathan's question as much as possible. But this isn't probably one people have heard about a lot. It's really one of those behind-the-scenes businesses. Matt, before you dig into what was actually in the report, give us the too long, didn't read of the 10-K for Lumentum as what it actually does.

Matt Frankel: Yeah, Lumentum has been around for a long time. It produces optical components for things like 3D mapping for high-speed communications, think fiber optics. For the longest time, this was a company that got most of its business from the rollout of 5G technology and telecommunications and things like that. But the key thing to know now is that the components Lumentum makes are extremely valuable parts of datacenter infrastructure, specifically when it comes to interconnections and other forms of AI infrastructure. That's what's really driving the business today.

The recent quarterly report was fantastic, even by Lumentum standards, which has produced a string of blowout earnings reports over the past year. Revenue was up 90% year over year, and 22% sequentially, that's an acceleration over the previous level. Earnings came in even better than expected. Adjusted operating margin expanded by 21 percentage points year over year to 32%. Beyond those headlines, Nvidia just made a $2 billion direct investment in Lumentum. Lumentum announced a brand new facility that it's building that should be online in 2028 that is directly related to its partnership with Nvidia, they're going to be providing the demand for it. It's like building a factory and you already have someone who's buying all the products. That bolstered its already cash-rich balance sheet. Lumentum now has over $3 billion of cash just sitting around. It's solidified that partnership between Nvidia and Lumentum, which is honestly its most important customer. Its guidance calls for 22% sequential growth in the current quarter, so things aren't slowing down just yet. This was a very strong report, and I completely see why the market reacted the way it did.

Jon Quast: When we were talking about Cisco, you're talking about a historically cyclical business that has this catalyst that is driving things. The Lumentum story is not any different. I think it's actually probably just the Cisco story on steroids right now because it's an even more extreme. Right now, over the past year, shares of Lumentum are up 1,200%, and currently shares trade for about 189 times earnings. Definitely not the more value-oriented 26, 27 times earnings that we were talking about with Cisco here. This is a high-flying stock that has a lot of very lofty expectations built into it almost entirely related to AI build-out, because, as to your point, Matt, previously, this was a business that came and went with the deployment of whatever wireless protocol was the new hot thing for telecom. When 3G was coming out, they had a lot of work. When 4G came out, and those periods in between, it was pretty dead. Again, when we're looking at Lumentum and those amazing numbers that we just saw, how do you reconci