BofA upgrades Nokia to Buy, seeing optical networks and European data center switches as opening a third growth phase

Overview

This report is BofA's rating upgrade note on Nokia. The core view is that Nokia is shifting from a traditional telecom equipment company to a more AI data center-driven optical networking and IP connectivity platform. The Infinera acquisition increases Nokia's exposure to optical systems and cloud customers, while the new CEO and strategy changes reinforce the focus on optical networks, IP networks, and AI infrastructure. At the same time, the Mobile Infrastructure business is improving margins through portfolio optimization, cost reduction, and softwareization.

Core views

The report is bullish on Nokia for five main drivers: first, hyperscaler-led demand for optical systems continues to grow; second, the migration of coherent pluggables from 400G to 800G creates a share and revenue inflection point; third, European sovereign data center buildouts create a differentiated entry point for Nokia into the data center switch market; fourth, Mobile Infrastructure improves margins through contract mix optimization, cost efficiency, and softwareization; fifth, Nvidia's investment and the AI-RAN partnership provide medium- to long-term optional upside. BofA therefore believes 2026E-2028E revenue, EBIT, and EPS will be above consensus.

Analysis framework

The report uses a bottom-up segment model to estimate revenue, margins, and market share opportunities for Optical Networks, IP Networks, Mobile Infrastructure, and other businesses. On valuation, it switches from the prior EV/EBITDA approach to SOTP, applying a higher 2027E EV/EBIT multiple to the faster-growing Optical & IP Networks and a lower multiple to legacy businesses such as RAN.

Methodology notes

• Valuation methodsSOTP valuation

  sum-of-the-parts valuation

  Because Optical & IP Networks and Nokia's other businesses have diverging growth trajectories, the report believes SOTP better captures the business mix shift than a company-wide EV/EBITDA approach; it applies a 30x multiple to the 2027E implied EBIT of Optical and IP Networks and a 10x multiple to the rest of the business.

• forecastingbottom-up segment model

  bottom-up segment forecasting

  The report separately models optical systems, coherent pluggables, intra-DC optics, IP routers, data center switching, and Mobile Infrastructure margins to form its 2026E-2028E revenue and earnings forecasts.

• scenario_analysisHuawei/ZTE replacement scenario

  European Huawei/ZTE replacement scenario analysis

  The report estimates Nokia's potential incremental revenue in 25%/50%/75% replacement scenarios at €834mn/€1.7bn/€2.5bn for 2028E, but does not include them in the base forecast because policy timing and scale remain uncertain.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NOKIA CORP / US.NOK

  Core coverage name and the subject of the rating upgrade

  Strengths

  Optical and IP network growth, cloud customer exposure from Infinera, European supplier status, Mobile Infrastructure margin improvement, Nvidia AI-RAN cooperation, and a solid net cash position.

  Weaknesses

  Traditional RAN market share is under pressure, data center switches still need to prove penetration, and AI-RAN revenue remains uncertain in the near to medium term.

  Comparison

  Optical systems and pluggables are mainly benchmarked against Ciena; data center switches face entrenched US vendors such as Cisco, Arista, Nvidia, and Juniper/HPE; the RAN business competes with Ericsson.

  Risks

  Cloud capex slowdown, weaker optical network share, switch revenue below expectations, RAN customer losses, and rising memory costs.

• NVIDIA CORP / US.NVDA

  Strategic partner and AI-RAN ecosystem participant

  Strengths

  Nvidia invests $1bn in Nokia and partners to bring commercial AI-RAN products into Nokia's RAN portfolio, which could strengthen Nokia's position in edge AI and GPU-accelerated RAN.

  Weaknesses

  The partnership is not exclusive, Nokia may still sell its own chips, and the commercialization pace and customer validation of AI-RAN remain unclear.

  Comparison

  Nvidia has a strong ecosystem in data centers and AI acceleration, but in RAN use cases it still needs to prove the economics of GPU solutions versus traditional low-cost RAN.

  Risks

  Operators may view GPUs as too expensive, and AI and RAN revenue may only appear after several years.

• COHERENT CORP / US.COHR

  Relevant to the coherent pluggables supply chain and market/competition reference

  Strengths

  The report discusses the migration of the coherent pluggables market from 400G to 800G, and Nokia could gain share with a stronger 800G portfolio.

  Weaknesses

  This asset is not a core coverage name in the report, and the relevance mainly comes from the optical module and pluggables market.

  Comparison

  In the pluggables opportunity, Nokia's main competitor is described as Ciena, while Coherent appears as an entity in the optical communications chain.

  Risks

  If the 800G migration is slower than expected or competition intensifies, Nokia's incremental revenue could come in below forecast.

Key data

• Rating and target priceBuy; PO €10.70/$12.40; current price €8.03Target price raised from €6.87/$7.96, and the rating was upgraded from Neutral to Buy.
• Optical & IP Networks growth2026/27/28E organic growth of 13%/12%/12%Above Nokia's 10%-12% growth guidance, with potential upside revisions expected.
• Optical Networks 2026E growthabout 18% organic growthDriven by optical system growth and incremental revenue from coherent pluggables.
• Optical system growth12% organic CAGR through 2028ECloud customer revenue is expected to grow 35%/30%/25% in 2026/27/28E.
• Coherent pluggables growthRevenue growth of 86%/60%/40% in 2026/27/28EDriven by the migration from 400G to 800G and Nokia's stronger 800G portfolio.
• Data center switch revenue€226mn/€339mn/€407mn in 2026/27/28EEstimated based on Nokia covering 100k/150k/200k GPUs and $2,625 switch spend per GPU.
• Mobile Infrastructure margin13.4% in 2025 to 16.3%/17.7%/17.8% in 2026/27/28EDriven by mix optimization, cost actions, and softwareization.
• EPS above consensus13.5%/14%/15.4% above consensus in 2026/27/28EDriven by higher revenue and improved cost efficiency in Mobile Infrastructure.
• Potential revenue from Huawei/ZTE replacement€834mn/€1.7bn/€2.5bnCorresponding to European 25%/50%/75% replacement scenarios, not yet included in the base forecast.
• Balance sheet2025 year-end net cash of €3.4bn; 2025 free cash flow of €1.5bnCash conversion rate of 80%+ supports growth investment and shareholder returns.

Impact & implications

If the report's view proves correct, Nokia's investment narrative will shift from a low-growth telecom equipment supplier to a beneficiary of AI data center optical interconnects, European sovereign cloud infrastructure, and network softwareization. Its valuation could also move away from a traditional RAN discount toward a higher multiple for its faster-growing optical and IP network businesses. The key validation points, however, are whether optical system demand remains sustained, whether 800G pluggables market share materializes, whether European data center switches can break through the barriers posed by US vendors, and whether Mobile Infrastructure margin improvement can offset pressure from RAN market share losses.

Risks

• Cloud customers slow spending on optical systems, especially if growth falls into the single digits over the next few years, making it difficult for Nokia to achieve its optical network growth target.
• Competition in optical systems and coherent pluggables is intense, and entrenched suppliers such as Ciena could leave Nokia with less share than expected.
• The data center switch market is dominated by US vendors such as Cisco, Arista, Juniper/HPE, and Nvidia, so Nokia's penetration outside Europe may remain limited.
• Mobile Infrastructure has already lost share to Ericsson in the RAN market and lost major US customers such as Verizon and AT&T; further share loss would pressure profitability.
• Huawei/ZTE replacement opportunities in Europe depend on policy, funding, and operator execution timing, making the timing and scale uncertain.
• AI-RAN commercialization is still early, and operators may be reluctant to adopt more expensive GPU-based solutions.
• High memory prices and supply-chain disruptions could affect baseband and router costs, pressuring margins.

What to watch

• Whether Nokia's 2026E Optical & IP Networks growth exceeds the 10%-12% guidance and leads to an upward revision of the outlook.
• Whether cloud customer revenue share and optical system order growth remain strong after the Infinera integration.
• Whether 800G coherent pluggables revenue shows the inflection point expected by the report in 2026E.
• Progress on European sovereign data center builds, the NScale partnership, and actual data center switch orders.
• Whether Mobile Infrastructure margins follow the path from 13.4% to about 17.8% by 2028E.
• Whether Huawei/ZTE replacement policy at the German and EU level expands to more countries and generates actual orders.
• Whether the Nvidia AI-RAN partnership turns from a technical collaboration into measurable revenue.
• Whether the market gradually revises upward the gap between 2026/27/28E EBIT and EPS versus consensus.