Cisco CEO says AI is already becoming a huge new market after it 'missed' the initial cloud computing boom

• Cisco CEO surprised analysts by mentioning it had already sold half a billion dollars of AI gear.
• Cisco is trying to woo cloud companies away from offerings by Nvidia.
• One analyst says it's a promising start on a potentially huge new market.

Cisco CEO Chuck Robbins dropped a bit of a bombshell during its earnings conference call Wednesday. That's when he told analysts the company had already sold over $500 million worth of equipment to the largest cloud computing companies for their AI needs.

The cloud companies (or hyperscalers as the tech world calls them) are buying from Cisco because they are experimenting with using Ethernet — the networking technology that Cisco is known for — for their AI needs instead of Infiniband. Infiniband is the high-speed networking technology more typically used by data centers, a market cornered by Nvidia when it bought leader Mellanox Technologies in a $6.9 billion in 2019.

So Cisco, along with AMD, Arista, Broadcom, HPE, Intel, Meta and Microsoft, formed a technology coalition last month called the Ultra Ethernet Consortium to work on making Ethernet twice as fast as the fastest 400 gigabits speeds available today, and tweaking the tech to better handle AI.

"To date, we have taken orders for over half a billion dollars for AI Ethernet fabrics. We are also piloting 800 gig capabilities for AI training fabrics," Robbins said.

True, half a billion is an insignificant amount of revenue for Cisco, which reported a record $57 billion in sales for its fiscal year 2023 on Wednesday and $3.07 earnings per share.

But Robbins says this new AI cloud market will be triple or more the size of the original and, this time, he plans to make sure Cisco gets its share.

"This would probably be three to four times the opportunity size of the original cloud build out. And, you know, unfortunately for us, as it's been well documented, we missed the original cloud build out," Robbins said.

He's referring to how cloud companies that run huge data centers like Google and Facebook built their own data center networking tech or chose data center specialists like Arista Networks.

"But I can say with every bit of confidence right now that as we go through this AI transition to Ethernet we are super well positioned," he said adding that "we now are installed in 21 use cases across the top six of these providers. And we expect that that momentum will just continue over the next few years."

Morgan Stanley analyst Meta Marshall is intrigued but cautiously skeptical. In a post-earnings research note, she pointed out that there's "an intense investor focus" on companies positioned for the AI infrastructure build-out and Cisco's investors want to hear its AI story. After all, at about a $225 billion market cap, Cisco's valuation is one-quarter's of Nvidia's $1 trillion.

While the $500 million sold so far is currently "small in terms of revenue, growing relevancy within this customer base is important, particularly given scale of opportunity," she wrote. "While we still think Cisco has smaller share within these hyperscalers, increasing penetration is a positive."