Morgan Stanley: Cisco Systems, Inc. (CSCO.US) is entering a "more sustainable growth phase," while the hardware upgrade cycle is still in the "very early stages."

After completing several rounds of communication with the management of Cisco Systems, Inc. (CSCO.US), Morgan Stanley concludes that this tech giant, led by Chuck Robbins, is on the path to "more sustainable growth." Analyst Meta Marshall pointed out in a report to clients that the current update ratio for the Catalyst 4K and 6K series devices is only about 7%, indicating "the overall update cycle is still in a very early stage." The Catalyst 4K is set to cease service at the end of this year, while the Catalyst 6K will reach its lifecycle end in late 2027. Marshall added, "Wireless access points are also facing a need for replacement, and first-generation Catalyst 9K customers may gradually migrate to updated platforms." She also mentioned, "The investor relations team noted that the software activation data shows the unactivated rate of shipped Meraki hardware has dropped to a five-year low, indicating that customers are quickly installing and activating devices rather than holding them in the channel or their own inventory." Marshall rated Cisco Systems, Inc. as "overweight," with a target price of $135. Looking deeper, Marshall stated that Cisco Systems, Inc.'s supply chain remains tight, but with its strong balance sheet, large-scale procurement commitments, and direct collaboration with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSMC.US), it holds a "competitive advantage" in supply acquisition. She added, "It is expected that by fiscal year 2027, Cisco Systems, Inc.'s wafer volume for 3nm, 5nm, and 7nm processes at Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will increase about tenfold, with 3nm still being the most constrained node." She further noted, "In the short term, 3nm capacity is only for the Cisco Systems, Inc. G300 chip, which has not yet gone into mass production, but management indicates there are clear expectations for recent design wins. The investor relations team also mentioned that Cisco Systems, Inc. provides diversified value to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR as a customer, creating strong momentum for deeper cooperation between the two parties." Other noteworthy points from the meeting include: despite current gross margin pressures, some favorable factors are expected to emerge as fiscal year 2027 progresses. Marshall indicated that a gross margin level of about 64% is seen as a "reasonable benchmark," but current guidance does not account for any pricing upside. Marshall also mentioned, "Management emphasizes that they do not intend to pursue growth through structurally low-margin businesses. Integrating Silicon One technology into the campus switching product portfolio should provide a positive boost to gross margins in the future, even though hardware still represents a larger percentage." Finally, Marshall stated that the company's security business is a "potential growth point underestimated by the market. As the process of network modernization continues to expand, its upside potential will gradually emerge." She concluded, "Demand for the next-generation firewalls and Hypershield products is robust, while Cisco Systems, Inc. is simplifying its product portfolio by phasing out outdated products and focusing investment on new platforms, further enhancing operational efficiency."