Morgan Stanley: Cisco (CSCO.US) is entering a "more sustainable growth phase" and the hardware upgrade cycle is still at a "very early stage"

According to Jinse Finance APP, after several rounds of communication with Cisco (CSCO.US) management, Morgan Stanley assesses that the technology giant led by Chuck Robbins is entering a “more sustainable growth trajectory.”

Analyst Meta Marshall noted in a client report that currently, the inventory update rate for Catalyst 4K and 6K series devices is only about 7%, indicating that “the entire upgrade cycle is still at a very early stage.” Among them, Catalyst 4K will be discontinued at the end of this year, while Catalyst 6K will reach the end of its lifecycle by the end of 2027.

Marshall added, “Wireless access points also face the need for upgrades, and customers using the first generation of Catalyst 9K may gradually migrate to newer platforms.” She also mentioned, “The investor relations team pointed out that among the shipped Meraki hardware, the software activation data shows the unactivated rate has dropped to a five-year low, which indicates clients are quickly installing and activating devices instead of keeping them in the channel or their own inventory.”

Marshall gave Cisco an “Overweight” rating, with a target share price of $135.

Looking deeper, Marshall said that Cisco’s supply chain remains tight, but thanks to its strong balance sheet, large-scale procurement commitments, and direct partnership with TSMC (TSMC.US), it has a “competitive advantage” in securing supply.

She added, “It is expected that by fiscal year 2027, Cisco’s wafer volume for TSMC’s 3nm, 5nm, and 7nm processes will increase by about 10 times, with 3nm still being the most scarce node.” She further noted, “In the short term, 3nm capacity is only used for Cisco G300 chips, which have not yet been mass-produced, but management says there are clear expectations of recent design wins. The investor relations team also mentioned Cisco provides value to TSMC by diversifying clients, creating strong momentum for deepening their partnership.”

Other key points worth noting from the meeting include: although current gross margins are under pressure, there could be some favorable factors as fiscal year 2027 progresses. Marshall pointed out that a gross margin level of about 64% is considered a “reasonable benchmark,” but current guidance does not include any upward pricing potential.

Marshall also mentioned, “Management emphasized they do not intend to pursue growth through structurally low-margin businesses. Integrating Silicon One technology into campus switch product lines, even though hardware still accounts for a high proportion, should provide a positive boost to gross margins in the future.”

Finally, Marshall stated that the company’s security business is “an underestimated potential growth point by the market, and as network modernization continues to expand, its upside opportunity will gradually become evident.”

She concluded, “There is steady demand for new generation firewall and Hypershield products, and Cisco is simplifying its product portfolio by retiring old products and concentrating investment on new platforms, further improving operational efficiency.”