Cisco's 11% Revenue Growth Drives Morgan Stanley Upgrade

Cisco Systems Inc. has received a bullish outlook from Morgan Stanley, with the financial giant's analysts upgrading the company to an "overweight" rating and setting a target price of 73 dollars per share. This optimistic stance comes as Cisco's stock closed at 66.06 dollars at the end of last week's trading session. The upgrade is driven by Cisco's strong performance in its third fiscal quarter of 2025, where the company's revenue grew by 11% year-over-year, reaching 14.1 billion dollars. This growth is attributed to the increasing demand for Cisco's networking solutions, particularly its switches, which are expected to drive a wave of upgrades in data centers.

Morgan Stanley's analysts highlight that Cisco's switches are at the forefront of a significant upgrade cycle in data centers. As enterprises continue to invest in modernizing their infrastructure, the demand for high-performance networking equipment is on the rise. Cisco's switches, known for their reliability and advanced features, are well-positioned to capture a significant share of this growing market. The analysts believe that this trend will not only boost Cisco's revenue but also enhance its market position, making it a compelling investment opportunity.

The upgrade to an "overweight" rating reflects Morgan Stanley's confidence in Cisco's ability to capitalize on the current market dynamics. The target price of 73 dollars per share suggests a potential upside from the current stock price. This optimistic outlook is supported by Cisco's strong financial performance and its strategic focus on innovation and customer satisfaction. The company's commitment to research and development, along with its robust product portfolio, positions it well to navigate the evolving technology landscape and maintain its leadership in the networking industry.

Cisco's third fiscal quarter of 2025 saw a significant increase in product orders, with a 20% year-over-year growth. Excluding contributions from Splunk, new orders still grew by 9%. In the third quarter, orders for AI infrastructure hardware from large network customers exceeded 600 million dollars, surpassing Cisco's management target of 10 billion dollars a season earlier. This surge in orders is driven by the increasing demand for AI infrastructure from large technology companies and cloud service providers, who are expanding their AI capabilities to meet the growing needs of applications like ChatGPT, Claude, and DeepSeek.

Cisco's high-performance switches and routers are essential for data transmission in computer networks and the internet. The company is also aggressively expanding its software products and SaaS subscription services, a transition accelerated by its acquisition of Splunk last year. As large-scale AI training and inference become more prevalent, data centers are experiencing a surge in demand for high-speed, low-latency network equipment. AI workloads, such as large model training and real-time inference, require massive data transfer between numerous AI GPUs, ASICs, or other accelerators, placing higher performance demands on data center switches, routers, and interconnect systems. As a long-time leader in high-performance network equipment for data centers, Cisco has a significant advantage in this area, benefiting directly from the increased demand for new and upgraded hardware.

Cisco has been collaborating closely with NVIDIA since 2024, focusing on optimizing data center interconnects and developing integrated data center network solutions. By leveraging NVIDIA's leading AI GPU acceleration technology, the two companies aim to provide high-performance network infrastructure that better supports AI training and inference. They are continuously exploring ways to integrate NVIDIA's hardware with Cisco's high-performance network equipment, offering customers comprehensive data center solutions that help them meet their AI infrastructure needs.

Historically, Cisco has upgraded its flagship Catalyst campus high-performance switch product line approximately every 6-7 years. The company is expected to launch the next generation of Catalyst products, the successor to the Catalyst 9K series, sometime this year, likely during the upcoming Cisco Live 2025 event. This new product line, Catalyst-2026, is anticipated to begin large-scale commercial sales in 2026. The previous Catalyst product line upgrade cycle, which began in 2017, was slowed by the unexpected COVID-19 pandemic.

Analysts from Morgan Stanley predict that the adoption of Catalyst-2026 products will accelerate, with the new series accounting for about 50% of Cisco's campus port shipments by 2028, a year earlier than the previous cycle. This upgrade is expected to drive revenue growth primarily through increased average selling prices (ASP), rather than significant increases in shipment volumes. From a cautious perspective, Cisco's campus business switch-related revenue is projected to rise from 9.8 billion dollars in fiscal 2024 to 10.6 billion dollars in 2026, and further to 12.8 billion dollars by 2029, with a compound annual growth rate (CAGR) of approximately 6% from 2024 to 2029, up from the previous 3%.