Cisco Drops 9% and Holds the Dow Back While the Nasdaq Climbs. Common Denominator: Memory Chips.

Record revenue, record earnings, $4 billion in AI orders, and the stock fell 9%. Cisco Systems (NASDAQ: CSCO) had quite a morning.

The result is a split morning session on Wall Street. The Nasdaq Composite (NASDAQINDEX: ^IXIC) index gained 0.53% as of 12:32 p.m. ET and the S&P 500 (SNPINDEX: ^GSPC) is up by 0.41%, while the Dow Jones Industrial Average (DJINDICES: ^DJI) is down 0.17%. All three looked much better two hours earlier, peaking around 10:30 a.m. ET with the Nasdaq flirting with a 1% jump.

^IXIC data by YCharts

What's driving the gap between the Dow and the Nasdaq

Let's start with Cisco. The network gear veteran fell 9.3% despite reporting record fourth-quarter revenue of $17.3 billion, up 18% year over year, and record adjusted earnings of $1.22 per share. The company also saw roughly $4 billion in quarterly AI orders from hyperscale customers. But Cisco's gross margins shrank due to soaring memory costs and a less lucrative hardware sales mix. As a result, Cisco subtracted about 68 points from the Dow and roughly $41 billion in market value.

You've heard the "expensive memory chips" story before, and those chipmakers benefit from Cisco's margin issues. SK Hynix (NASDAQ: SKHY) rose 7.8%, adding about $95 billion in market value and 0.17 percentage points to the Nasdaq Composite, the largest single contribution to that index. On top of Cisco's market signals, the Korean government is spending billions on the local chip-making infrastructure, sending both Hynix and Samsung (OTC: SSNLF) stocks skyward today.

Image source: Getty Images.

Micron Technology (NASDAQ: MU) gained 5.1% and SanDisk (NASDAQ: SNDK) surged 13.5% with an ambitious investor day presentation, reversing part of a brutal slide that had cut the stock in half from its June high.

Memory makers get to charge more; everybody buying those chips gets to pay more. Cisco is simply one of the first big companies to show the memory bill in an earnings report.

The Dow found a rescuer in Goldman Sachs (NYSE: GS), up 1.1% for about 68 points, which almost precisely offsets Cisco's damage. The financial giant announced a fairly small buyout in the options-based income space yesterday. Today, investors are embracing the unexpected deal after sleeping on it.

Space Exploration Technologies (NASDAQ: SPCX) fell 3.4%, giving back part of Wednesday's gain and subtracting 0.12 percentage points from the Nasdaq. On the macro side, July producer prices were unchanged for the month, with core PPI up 0.2%.

The real costs of a chip shortage

The Cisco story deserves more attention than Thursday's macro data. A company can post record revenue, record earnings, and $4 billion in AI orders and still fall 9%. Not because the stock was expensive before this report, but because component costs are rising faster than the revenue line.

Chip shortages are usually covered as good news, because the companies making the chips are the ones giving interviews about them. As a longtime Micron shareholder, I appreciate the wealth-building power of the AI-driven chip shortage. Buyers may raise concerns about component costs in advance, but Wall Street won't listen until margins are shrinking.

There will be more of those bellwether reports, and knowing which side of that trade a company sits on is worth more than knowing what the Dow did on a rather ordinary Thursday.

Anders Bylund has positions in Micron Technology. The Motley Fool has positions in and recommends Cisco Systems, Goldman Sachs Group, and Micron Technology. The Motley Fool has a disclosure policy.