Rising memory costs drag down gross profit expectations, Cisco Systems, Inc. (CSCO.US) stock price under pressure, Wall Street still maintains a bullish stance.

Cisco Systems, Inc. (CSCO.US) became the focus of the market on Thursday. Despite the performance and guidance of this network equipment giant being evaluated as "solid" by some Wall Street analysts, concerns over the significant increase in memory costs have led investors to worry about the gross margin, causing Cisco Systems, Inc. stock to drop more than 10% at the opening. Bank of America Corp analyst Tal Liani pointed out that the market expectations for Cisco Systems, Inc. in the fourth quarter were "conservative." The company's revenue guidance for the third quarter showed a year-on-year growth of 9.5%, significantly higher than the market's expected 7.3%. However, he also noted that stronger hardware growth, a higher proportion of cloud business, and a year-on-year surge of about 400% in memory prices are eroding the company's gross margin. Liani stated in his report that price increases on products are expected to offset some of the cost pressures. Recently, prices for products related to campus switches and computing have been raised by about 3%, and with memory prices continuing to rise since the beginning of the year, the possibility of further increases still exists. Management expects gross margin pressure to continue in the short term, but through operational efficiency improvements, the impact may be mitigated to maintain a stable operating profit margin. Liani maintained a "buy" rating and a target price of $95 for Cisco Systems, Inc., believing that the company is benefiting from both a strong hardware cycle and network upgrade cycle. He added that Cisco Systems, Inc. is well-positioned in the campus network upgrade cycle, with additional growth expected from servers, Wi-Fi, and industrial IoT solutions. The security business is expected to remain weak for the year, but demand for new products such as SASE, XDR, and upgraded firewalls is healthy, currently overshadowed by pricing adjustments from Splunk, with this pressure expected to ease by the end of the year. Liani expects total revenue growth for Cisco Systems, Inc. in the 2026 fiscal year to accelerate to 8.5%, with operating profit margin remaining at 34%. The company has already returned $6.6 billion in capital to shareholders since the beginning of the year, and with a forward P/E ratio of about 18.5, the valuation is considered attractive. Evercore ISI analyst Amit Daryanani believes that the increase in memory costs is "just a small speed bump" and will not shake Cisco Systems, Inc.'s strength in the field of artificial intelligence. Data shows that AI-related orders for Cisco Systems, Inc. in the second quarter reached $2.1 billion, higher than the $1.3 billion in the previous quarter, with the company expecting AI orders to exceed $5 billion in the 2026 fiscal year, generating revenue of over $3 billion. Daryanani stated that considering the recent increase in the stock price, the earnings per share expectation may not see further upgrades in the short term due to this financial report, but structurally, AI momentum, campus network upgrades, and demand from enterprises and sovereign clients are expected to drive accelerated growth in the network business for Cisco Systems, Inc. in the 2026 and 2027 fiscal years. He reiterates an "outperform" rating and a target price of $100, expecting earnings per share for the 2027 fiscal year to exceed $5. Citigroup analyst Atif Malik also sees positive momentum in AI and has slightly raised the target price for Cisco Systems, Inc. from $85 to $90. Malik stated that the main reason for the pressure on gross margins as mentioned by management is due to the significant increase in the proportion of hardware, with memory costs being only a partial factor. Cisco Systems, Inc. has slightly raised its revenue growth guidance for the 2026 fiscal year by 150 basis points to a year-on-year growth of 8.5%, reflecting an acceleration in demand for campus networks and data center switches. Orders from super large AI customers in the quarter rose to $2.1 billion, with expectations for the 2026 fiscal year to exceed $5 billion and related sales to surpass $3 billion. Although AI sales from new cloud service providers, sovereign, and enterprise clients do not yet constitute a major contribution in the 2026 fiscal year, orders related to this in the January quarter reached $350 million, a 75% increase from the previous quarter. The security business remains a weak point, decreasing by 4% year-on-year. Malik has raised his earnings per share forecast for the 2026 and 2027 fiscal years by about 1% and remains essentially flat, maintaining a "buy" rating.