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

Core Insights - Cisco Systems (CSCO) is experiencing gross margin expansion due to a flexible and diversified supply chain, productivity improvements, and disciplined cost management, which are expected to positively impact operating margins [1][10] Financial Performance - In Q3 fiscal 2025, Cisco's product gross margin increased by 70 basis points year over year to 67.6%, aided by contributions from Splunk and a favorable product mix in high-margin segments like Security and Observability [2] - The non-GAAP gross margin for Cisco expanded by 30 basis points year over year, reaching 34.5% in the same quarter, exceeding the company's guidance [3] - Cisco anticipates a non-GAAP gross margin for Q4 fiscal 2025 to be between 67.5% and 68.5%, with an expected non-GAAP operating margin between 33.5% and 34.5% [4] Competitive Landscape - Hewlett-Packard Enterprise (HPE) is emerging as a significant competitor to Cisco, particularly after its $14 billion acquisition of Juniper Networks, offering AI-driven, cloud-native networking solutions, although HPE's gross margins are around 29% compared to Cisco's 65% [6] - Arista Networks (ANET) is a key player in cloud and AI-driven networking, leading in 100-gigabit Ethernet switches, with gross margins around 64%, positioning it as a strong competitor against Cisco [7] Stock Performance and Valuation - Cisco's shares have appreciated by 18% year to date, outperforming the Zacks Computer – Networking industry's return of 15.6% [8] - From a valuation perspective, Cisco appears overvalued with a forward 12-month price-to-sales (P/S) ratio of 4.6, higher than the industry's 4.39X [11] Earnings Estimates - The Zacks Consensus Estimate for Cisco's earnings is $3.79 per share for fiscal 2025 and $4.00 per share for fiscal 2026, reflecting year-over-year growth of 1.61% and 5.73%, respectively [14]