UBS: Cisco Systems — Silicon/AI Drive Momentum but Memory-Related Gross Margin Headwinds Obscure the Outlook
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UBS maintains a Buy rating on Cisco Systems, raising the 12-month target price from $90 to $95. Cisco reported strong results for the January 2026 quarter, with AI orders reaching $2.1 billion, up approximately 61% sequentially, and product orders growing 18%, both exceeding expectations. However, the gross margin contracted to 67.5%, below the UBS estimate of 68.1%, primarily driven by rising memory costs and a higher proportion of hardware revenue. The company raised its fiscal 2026 revenue and EPS guidance, lifting the midpoint EPS from $4.11 to $4.15. UBS expects gross margins to bottom in the April quarter, while AI order momentum should persist into fiscal 2027. At approximately $79, the stock trades at roughly 17 times forward 2027 EPS, offering an attractive valuation.
During the January quarter, Cisco's networking revenue grew about 21%, fueled by a 100% surge in hyperscaler demand. Security revenue declined roughly 4% year-over-year due to a subscription model transition. UBS updated its fiscal 2026 and 2027 EPS estimates to $4.14 and $4.52, respectively, balancing stronger order momentum against escalating memory costs. Management guided an April quarter gross margin of 65.5-66.5%, which UBS views as the trough. With trailing twelve-month AI orders reaching $4.9 billion, visibility remains strong. UBS believes achieving $5 EPS by 2027 is feasible. The revised $95 target price relies on roughly $4.75 estimated 2027 EPS and a 20 times target P/E multiple.