Morgan Stanley reveals Cisco's quiet edge over rivals

Morgan Stanley has highlighted a lesser-known advantage that could propel Cisco Systems' (CSCO) stock momentum further. The company's stock has gained approximately 46% year-to-date, closing near $111 per share. While much of the attention has focused on Cisco's order volumes and role in connecting AI data centers, Morgan Stanley has identified another crucial factor: Cisco's edge in securing scarce components essential for the networking industry.

Memory chips, pump lasers, and cutting-edge silicon are all in short supply, and companies that can secure these parts gain a competitive edge, while others must turn away potential clients. Cisco's strength lies in three areas: a robust balance sheet enabling cash commitments upfront, larger purchase agreements than smaller competitors, and a direct relationship with Taiwan Semiconductor Manufacturing (TSMC), the world's leading chipmaker.

Cisco's share count with TSMC is expected to multiply tenfold in fiscal 2027, while also diversifying the supplier's customer base. In addition to supply constraints, Cisco's core business of selling network switches, such as the Catalyst line, remains substantial. Only 7% of the older Catalyst 4000 and 6000 series has been upgraded, leaving ample opportunities for replacements when these products reach end-of-life.

The Catalyst 4000 is due to end its life by the end of 2026, while the Catalyst 6000 follows suit by the end of 2027. Furthermore, Cisco's software data from Meraki hardware indicates that customers are swiftly installing new equipment, signaling genuine demand. The report delves into Cisco's strategic positioning in "scale-across" technology, which connects separate GPU clusters across data centers to function as a unified system.

Cisco is well-positioned in this space, with three design wins for its P200 routing chip, despite further expansion still on the horizon. Morgan Stanley maintains an Overweight rating and a $135 price target for Cisco, representing a 22% premium over the current share price, based on the bank's projection of 26 times Cisco's projected 2027 earnings.

Analyst Meta Marshall, who leads networking coverage at Morgan Stanley, has a strong track record with a 53% success rate across a portfolio of 46 stocks. The $135 target is rooted in Cisco's projected earnings and reflects the bank's positive outlook on the company's prospects.