12:40 PM EST, 11/13/2025 (MT Newswires) -- Cisco Systems' ( CSCO ) stronger-than-expected artificial intelligence orders for the fiscal first quarter represented a "real surprise," Morgan Stanley said in a note emailed Thursday as the brokerage sees a potential rerating given the company's growing AI business.

Late Wednesday, the networking equipment market reported quarterly results that surpassed estimates on Wall Street as demand for its products grew. AI infrastructure orders from hyperscaler customers rose to $1.3 billion from the fiscal fourth quarter's $800 million tally.

"While we had entered the quarter relatively muted, we did note that AI orders greater than ($1 billion) would be a positive catalyst, which Cisco ( CSCO ) outperformed with ($1.3 billion) of orders," Morgan Stanley said.

The company expects roughly $3 billion in fiscal 2026 AI infrastructure revenue from hyperscalers, Chief Executive Chuck Robbins said during an earnings call, according to a FactSet transcript.

That compares with more than $2 billion reported for fiscal 2025.

The stock was up 4.8% in Thursday trading, taking its year-to-date gains to 31%.

"Cisco's ( CSCO ) AI business has gone from (about) 2% of the company to almost 5% in a couple of years, becoming a more meaningful contributor to growth," the investment firm said. "Combined with a healthy campus upgrade cycle, this lays the groundwork for rerating potential, particularly if sovereign opportunity becomes more sizeable over the next year."

Morgan Stanley reiterated its overweight rating on the stock, while raising the price target to $82 from $77.

Cisco's ( CSCO ) gross margins remained resilient at 68.1% in the first quarter, which exceeded Morgan Stanley's 68% estimate, indicating that commodity pricing headwinds were manageable, the brokerage said.

The firm, however, said it is watching Cisco's ( CSCO ) security business, which delivered a disappointing performance in the quarter.

Revenue at the security division fell 2% year over year, worse than Morgan Stanley's expectation of 4.5% growth and well below 15% to 17% targets the company has set, according to the report.

"The company noted that while ongoing product transition is a headwind on the core business, the difference in performance (versus) expectations was largely attributable to Splunk revenue coming in differently than expected," Morgan Stanley said.

Cisco ( CSCO ) acquired cybersecurity firm Splunk in March 2024.

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