Cisco's Margins Riding on Supply Chain: Will the Expansion Continue?

Cisco Systems CSCO has been benefiting from a flexible and diversified supply chain that is driving gross margin expansion. This improvement, along with productivity improvements and disciplined cost management, bodes well for operating margin expansion.

Cisco’s investments in regional manufacturing and logistics have minimized exposure to high-tariff areas, helping the company cut import-related expenses. In third-quarter fiscal 2025, product gross margin expanded 70 basis points (bps) year over year to 67.6%, driven by strong contribution from Splunk and a profitable product mix, particularly in high-margin segments like Security and Observability.

In the third quarter of fiscal 2025, Cisco’s non-GAAP gross margin expanded 30 bps year over year, hitting the high end of its guidance. Non-GAAP operating margin was 34.5% in the reported quarter, above the high end of the company’s guidance.

Cisco expects fourth-quarter fiscal 2025 non-GAAP gross margin to be between 67.5% and 68.5%. Non-GAAP operating margin is expected to be between 33.5% and 34.5%. Strong demand for AI infrastructure and cybersecurity solutions is expected to drive the company’s ability to sustain margin momentum.

Cisco also assumes that current tariff exemptions will remain in place, which includes China at 30%, partially offset by an exemption for semiconductors and certain electronic components. Mexico and Canada at 25% for the components and products that are not eligible for the current U.S. MCA exemptions.

Cisco Faces Stiff Competition From HPE & ANET

Hewlett-Packard Enterprise HPE is emerging as a strong Cisco competitor, especially post its $14 billion acquisition of Juniper Networks. Leveraging Aruba and SD-WAN, HPE now offers AI-driven, cloud-native networking solutions that challenge Cisco’s enterprise lead. However, HPE’s gross margins lag significantly, at around 29%, compared to Cisco’s robust 65% (GAAP basis). Though HPE’s focus on hybrid-cloud infrastructure, strategic acquisitions and expanding generative AI capabilities positions it for long-term growth.

Arista Networks ANET is a key player in cloud and AI-driven networking, leading in 100-gigabit Ethernet switches with superior capacity, low latency and power efficiency. ANET supplies high-performance solutions to hyperscalers like Microsoft and Meta Platforms. Arista’s software-defined Extensible Operating System offers a major advantage over Cisco’s hardware-centric model. With gross margins around 64%, Arista combines strong profitability with rapid innovation, positioning it as a top-tier competitor in the next-gen networking landscape.

CSCO’s Price Performance, Valuation & Estimates

Shares of Cisco have appreciated 18% year to date compared with the Zacks Computer – Networking industry’s return of 15.6%.

CSCO YTD Price Return Performance

From a valuation standpoint, CSCO appears overvalued, trading at a forward 12-month price-to-sales (P/S) ratio of 4.6, higher than the industry’s 4.39X. Cisco carries a Value Score of D.

CSCO Forward 12-Month P/S Ratio

The Zacks Consensus Estimate for CSCO’s earnings is pegged at $3.79 per share for fiscal 2025 and $4 per share for fiscal 2026, reflecting year-over-year growth of 1.61% and 5.73%, respectively. The fiscal 2025 estimate has been revised upward by a cent over the past 30 days, while projections for fiscal 2026 have remained steady.

CSCO stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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