Cisco Shares Tumble Amidst Memory Price Surge Driven by AI Demand
Cisco Systems experienced a significant downturn, with its stock closing down 12% on Thursday, marking its most substantial single-day decline since 2022. This sharp sell-off was primarily attributed to escalating memory component costs, which are directly impacting the networking giant’s profit margins.
The current global memory shortage, fueled by the insatiable demand for high-bandwidth memory (HBM) essential for artificial intelligence data centers, has sent component prices soaring. This surge in demand for AI infrastructure has diverted production capacity, creating ripple effects across the broader tech landscape. Consequently, the availability of memory for other consumer electronics, including smartphones, has been constrained.
This widespread memory crunch has introduced a layer of uncertainty for a diverse range of technology firms. Companies such as Apple and Dell, which rely heavily on memory for their consumer devices, are facing potential production challenges and margin pressures. Even semiconductor manufacturers are not immune; Qualcomm, for instance, cited the memory shortage when it issued cautious guidance earlier this month, signaling the pervasive nature of this supply chain constraint. Now, Cisco is feeling the direct impact.
During the company’s recent earnings call, Cisco CEO Chuck Robbins acknowledged the rising memory prices across the market. He outlined a proactive strategy to mitigate these cost pressures, which includes implementing price adjustments for its products, revising existing contracts, and actively negotiating terms with suppliers to better reflect the evolving component cost environment.
“In terms of memory, we’re going to control what we can control,” stated Cisco finance chief Mark Patterson on the call, emphasizing a pragmatic approach to managing the situation.
While Cisco reported better-than-expected quarterly financial results on Wednesday, the market’s reaction was decidedly negative. The company also issued a subdued forecast for the upcoming period, which contributed to the significant stock decline.
The reported product gross margin for the quarter stood at 66.4%, a slight decrease of 130 basis points compared to the previous year. Patterson attributed this contraction primarily to unfavorable product mix and the aforementioned higher memory costs, underscoring the immediate financial consequences of the component price increases. This situation highlights the delicate balance tech companies must strike between meeting the booming demand for AI infrastructure and managing the inflationary pressures on critical hardware components.
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