Erste Group lowered its recommendation on Cisco Systems (ticker: CSCO) from Buy to Hold on Tuesday, citing concern that rising component costs will compress gross margins even as management projects revenue expansion for fiscal 2026.
Guidance and recent performance
Cisco’s management has given a positive outlook for fiscal year 2026, forecasting full-year sales of approximately USD 61.5 billion. That guidance implies growth from the company’s last twelve months of revenue totaling USD 59.05 billion, which the company reported as a 9% year-over-year increase.
In its fiscal second-quarter 2026 report, Cisco exceeded consensus on both earnings and sales. Adjusted earnings per share came in at $1.04, above the expectation of $1.02, while revenue reached $15.3 billion versus the anticipated $15.11 billion. Yet, these results have not fully offset investor concerns around margins.
Margin outlook and cost pressures
Management revised the near-term gross-margin outlook down, setting the forecast for the coming quarter at 66%. The firm described this as a decline from the prior quarter and noted it is below Cisco’s current gross profit margin of 64.78%. Cisco attributed the expected margin deterioration primarily to sharply rising costs for DRAM and other memory components.
Cisco’s management has given a positive outlook for the new financial year 2026, signaling expectations for continued growth. For the full fiscal year 2026, the company forecasts sales of approximately USD 61.5 bn. However, Cisco lowered its gross margin forecast for the coming quarter to 66%. This is also a decline compared to the last quarter and is due to sharply rising costs for DRAM and other memory components. We expect these negative effects to continue in the longer term.
Erste Group’s analyst expressed expectation that the negative effects from rising component costs will persist over a longer time frame, presenting a headwind to profitability even if revenue continues to grow.
Market reaction and valuation
Market pricing has reflected those concerns: the stock is trading at $77.84 and has recorded a 10.16% decline over the past week. The shares trade at a price-to-earnings ratio of 27.88, a level the firm characterizes as high relative to near-term earnings growth. Cisco remains a large-cap company with a market capitalization of more than $306 billion, and maintains a prominent position in the Communications Equipment industry.
Contrasting analyst views
Not all analysts have moved in the same direction. UBS lifted its price target to $95 from $90 and kept a Buy rating, pointing to strong execution in areas such as artificial intelligence-related products and product orders that exceeded expectations. UBS said this strength provides improved visibility into growth prospects for the second half of fiscal 2026 and into fiscal 2027.
What to watch
- Whether memory component costs - chiefly DRAM - remain elevated and how quickly any cost inflation moderates.
- How margin guidance and actual gross profit margins evolve in coming quarters relative to the 66% forecast for the next quarter.
- Top-line execution and order momentum in key product areas cited by UBS as drivers of visibility into future growth.
Erste Group’s downgrade underscores a central tension in Cisco’s near-term story: continued revenue growth and stronger-than-expected quarterly results versus margin pressure from rising input costs. Investors assessing Cisco will need to balance the company’s scale and market position against cost-cycle risks that can compress profitability even amid expanding sales.