Cisco Stock Valuation Faces Challenge from Gross Margin Pressure

Cisco stock has had a remarkable year, increasing by 62% over the last 12 months. The company's success can be attributed to its position at the heart of a 'networking super cycle,' which has fueled growth and led to record sales. However, this success comes with a price, and investors are now facing a challenge in terms of profitability.

The AI boom, a key driver of Cisco's growth, is putting pressure on the company's gross margins. The non-GAAP gross margin came in at 66.3% in fiscal Q4 2026, and the outlook for the first quarter of fiscal 2027 points to a range of 65.0% to 66.0%, a step down of up to 130 basis points.

This margin pressure is further exacerbated by Cisco's high valuation, with a price-to-sales multiple of 7.2, hovering near its 10-year high of 7.6. The market has already priced in the super cycle, leaving little room for error and making it difficult to sustain the premium multiple.

Cisco's AI opportunity is significant, but the company must deliver on high growth expectations without letting profitability erode. This presents a challenge for investors, who are now faced with the risk that the quality of Cisco's growth may not be sufficient to justify its premium price.