01:08 PM EDT, 08/13/2026 (MT Newswires) -- Cisco Systems' ( CSCO ) gross margin is likely to face further pressure from faster hardware mix into its new fiscal year, though the company is seeing broad-based strength across its core enterprise business and hyperscaler artificial intelligence infrastructure, Morgan Stanley said in a note e-mailed Thursday.

Late Wednesday, the networking equipment maker reported better-than-expected fiscal fourth-quarter results. Adjusted gross margin fell to 66.3% from 68.4% a year earlier. For the ongoing quarter, the company expects non-GAAP gross margin between 65% and 66%.

"(Cisco ( CSCO )) is seeing broad-based strength across core enterprise and hyperscaler AI, with improving share momentum, as the company is facing fewer supply-chain challenges," Morgan Stanley said in a note to clients. "Faster hardware mix is expanding (gross margin) pressure into (2027), but incrementals on AI business remain high."

Gross margin was a "clear point of friction" heading into the fourth-quarter print, with most investors expecting the period to be the "margin trough," according to the note. However, the first-quarter guidance suggests that mix pressure will persist as stronger hardware growth flows through the company's model, the brokerage said.

Cisco ( CSCO ) shares were down 9.4% in Thursday afternoon trade. So far in 2026, the stock has gained nearly 46% in value.

Morgan Stanley sees pressure on gross margin to increase in the second quarter and remain for much of the ongoing fiscal year, with overall margins contracting to about 64%. However, the brokerage expects "disciplined" operating expenditures and strong operating leverage to help offset lower gross margins from accelerated hardware shipments.

Morgan Stanley raised its price target on the company's stock to $135 from $130.

"We remain (overweight) on (Cisco ( CSCO )) as we see it as a low-volatility way to get exposure to AI, and one of the best ways to position for enterprise investment in AI, particularly on-premise investment," the brokerage wrote. "While (gross margin) pressure weighs on follow-through on demand upside, (we) still see risk-reward balanced more positively in the near term."

Cisco's ( CSCO ) core business, excluding hyperscalers, is expected to grow 10% in fiscal 2027, while hyperscaler AI infrastructure revenue is pegged to reach $7.5 billion, representing a roughly 90% year-over-year growth, according to Morgan Stanley.

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