Damo: Cisco (CSCO.US) is entering a “more lasting growth phase” and the hardware upgrade cycle is still “very early”

The Zhitong Finance App learned that after completing multiple rounds of communication with Cisco (CSCO.US) management, Morgan Stanley determined that the tech giant, headed by Chuck Robbins (Chuck Robbins), is entering a “longer-lasting growth path.”

Analyst Meta Marshall (Meta Marshall) pointed out in a report to customers that the current inventory update ratio of Catalyst 4K and 6K series devices is only about 7%, and “the entire update cycle is still in a very early stage.” Among them, the Catalyst 4K will cease service at the end of this year, while the Catalyst 6K will reach the end of its life cycle at the end of 2027.

Marshall added, “Wireless access points are also facing a need for a new generation, and first-generation Catalyst 9K customers may gradually migrate to newer platforms.” She also mentioned, “The investor relations team also pointed out that among Meraki hardware already shipped, the software activation data showed that the inactivation rate had dropped to its lowest level in five years, which indicates that customers are quickly installing and using devices rather than putting them in backlogs in channels or their own inventory.”

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

Looking further, Marshall said that Cisco's supply chain is still tight, but with its strong balance sheet, large-scale procurement commitments, and direct partnership with TSMC.US, it has a “competitive advantage” in obtaining supply.

She added, “Cisco's 3nm, 5nm, and 7nm process wafers are expected to increase approximately tenfold in the 2027 fiscal year, with 3nm still the most scarce node.” She further stated, “In the short term, the 3nm production capacity will only be used for the Cisco G300 chip. The chip has not yet been mass-produced, but management said there are clear expectations that the design will win the bid in the near future. The investor relations team also mentioned that Cisco has provided TSMC with diversified customer value, which has created a strong impetus for the two sides to deepen cooperation.”

Other notable points from the conference include: Despite the current pressure on gross margins, it is expected to usher in some favorable factors as the 2027 fiscal year progresses. Marshall pointed out that the gross margin level of around 64% is regarded as a “reasonable benchmark,” but the current guidelines do not include any room for upward pricing.

Marshall also mentioned, “Management emphasized that it does not intend to pursue growth through structurally low profit margin businesses. Integrating Silicon One technology into the campus exchange product portfolio should provide a positive boost to gross margins in the future, even if the share of hardware is still high.”

Finally, Marshall said that the company's security business is “a potential growth point underestimated by the market, and as the network modernization process continues to expand, its upward space will gradually become apparent.”

She concluded, “Demand for next-generation firewalls and Hypershield products is robust, and Cisco is streamlining the product portfolio by phasing out old products and investing in new platforms to further improve operational efficiency.”