Cisco Systems (NASDAQ:CSCO) recently reported lower free cash flow for its fiscal second quarter ended Jan. 24, 2026. Even so, management delivered solid revenue growth and guided toward higher earnings for the year. That combination has kept analysts constructive on the stock.

With shares trading at $76.87, down from a recent peak of $86.78 just before the Feb. 11 earnings release, investors are reassessing the Cisco stock valuation. The average price target among 26 analysts tracked by Yahoo! Finance stands at $87.86, implying roughly 14% upside from current levels.

The key question now is whether the dip in free cash flow changes the longer-term investment case.

Revenue Growth Offsets Lower Free Cash Flow

In fiscal Q2, Cisco generated $15.3 billion in revenue, up 10.3% year-over-year. Earnings per share rose even faster, increasing 11%. On the surface, those results suggest a healthy core business benefiting from AI infrastructure demand and enterprise networking upgrades.

However, operating cash flow declined from $2.24 billion last year to $1.82 billion this quarter. That translates into an operating cash flow margin of 11.8%, down from 16% a year ago and more than 21% in the prior quarter.

After capital expenditures, free cash flow came in at $1.54 billion, or 10% of revenue. That compares with $2.03 billion and a 14.5% margin in the same quarter last year. The decline reflects higher capital spending, particularly related to AI networking investments and next-generation infrastructure.

Despite the quarterly dip, trailing 12-month free cash flow remains robust at $12.24 billion. That represents a 20.73% free cash flow margin, only modestly below the prior year’s 23.6%. From a broader perspective, Cisco continues to generate significant cash relative to revenue.

Projecting Future Free Cash Flow

To understand the Cisco stock valuation, it helps to project forward cash generation. Management guided for full-year revenue between $61.2 billion and $61.7 billion, with a midpoint of $61.45 billion. That would mark an 8.5% increase from last year’s $56.65 billion.

Analysts are slightly more optimistic. Consensus estimates point to $61.56 billion in fiscal 2026 revenue and $64.93 billion the following year. Averaging those figures implies roughly $63.25 billion in revenue over the next 12 months.

If Cisco maintains a free cash flow margin near 21%, slightly above its current trailing margin, projected free cash flow could reach approximately $13.28 billion:

$63.25 billion x 21% = $13.28 billion

That would represent about 8.5% growth compared to the last 12 months. In other words, while quarterly cash flow dipped, the broader trajectory could still trend upward if revenue forecasts hold.

Valuation Based on Free Cash Flow Yield

At today’s market capitalization of about $302.5 billion, Cisco’s trailing free cash flow yield is roughly 4.05%:

$12.24 billion / $302.5 billion = 4.05%

If next year’s free cash flow reaches $13.28 billion and the market assigns a 4% yield, the implied market value would be:

$13.28 billion / 0.04 = $332 billion

That suggests roughly $30 billion in potential upside, or about 10% higher than today’s valuation. Applying that increase to the current share price yields an implied target near $84.56.

This estimate is conservative compared to analyst targets. Yahoo! Finance shows an average price target of $87.86, while Barchart reports $87.15. Another survey from AnaChart.com indicates a higher average target of $98.23. Taken together, those estimates cluster between 10% and 18% above the current price.

From a Cisco stock valuation standpoint, shares appear reasonably priced, especially given the company’s strong balance sheet, recurring revenue base, and continued buybacks.

Strategic Investments and AI Tailwinds

Part of the recent free cash flow pressure stems from higher capital expenditures tied to AI-related networking infrastructure. Cisco is investing aggressively in Silicon One chips, AI data center switches, and energy-efficient systems.

While these investments reduce near-term free cash flow, they may strengthen long-term competitive positioning. As hyperscalers and enterprises scale AI workloads, demand for high-capacity, low-latency networking solutions is rising.

If Cisco successfully captures a larger share of AI infrastructure spending, revenue growth could accelerate beyond current projections. That scenario would improve the Cisco stock valuation over time, even if margins temporarily fluctuate.

A Conservative Options Strategy

For investors who believe Cisco stock is undervalued but want a margin of safety, selling short-term out-of-the-money put options can be one approach.

For example, the March 20, 2026 expiration shows a $72.50 strike put trading with a midpoint premium of $0.87. Selling one contract generates $87 in premium while requiring $7,250 in collateral.

That represents a one-month yield of about 1.2%. If shares stay above $72.50, the option expires worthless and the seller keeps the premium. If shares fall below that level, the effective purchase price would be $71.63 after accounting for the premium received.

This strategy allows investors to get paid while potentially entering at a lower price. More aggressive investors could combine this approach with longer-dated call options to gain leveraged upside exposure.

The Bottom Line

The recent drop in quarterly free cash flow does not appear to undermine the broader Cisco stock valuation. Revenue growth remains solid, earnings are rising, and trailing cash generation is still strong.

If revenue meets or exceeds guidance and free cash flow margins stabilize near historical levels, shares could reasonably trade 10% to 18% higher over the next year. Combined with buybacks and dividend income, that presents a balanced risk-reward profile.

While short-term volatility may persist, Cisco’s cash flow strength and AI positioning suggest that the stock still offers meaningful upside from current levels.

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