Nokia's Optical Networking Strength and Data Center Switch Ramp-Up Support Buy Rating

Overview

BofA Securities released a research report on Nokia, maintaining its 'Buy' rating and raising the target price from €10.7 to €11.0 (ADR target: $12.7). The primary catalyst is Nokia’s substantial upward revision to its FY26 organic growth guidance for Optical & IP Networks—from 10–12% to 18–20%. This revision reflects two key drivers: sustained strength in optical networking and rapid ramp-up of the data center switch business. Notably, design wins for data center switches are concentrated among U.S. hyperscalers—signaling Nokia’s successful entry into the large yet highly competitive U.S. data center market, whereas prior market expectations had centered on smaller European sovereign data center deployments.

Core views

The report concludes that Nokia’s growth engines are now fully materializing. On optical networking: Organic growth accelerated to 20% YoY in Q1—3.5 percentage points above consensus—driven by strong performance across optical systems and pluggable optical modules. Nokia’s AI/cloud-related orders within Network Infrastructure reached €1 billion this quarter, with a book-to-bill ratio "well above 1," indicating robust demand. On data center switches: Multiple design wins were secured in Q1, expected to drive revenue ramp-up in IP Networks starting in Q2. The customer base is expanding beyond European sovereign data centers to include U.S. hyperscalers—a positive development not previously priced in by the market. Technology Standards (patent licensing) revenue within Mobile Infrastructure also exceeded expectations by 4%, as new licensing agreements offset declines from product portfolio streamlining in other MI businesses. Financial forecast adjustments: BofA raised FY27–28 revenue forecasts by 2–4%. However, due to higher operating expenses during the new product ramp-up phase, FY26/FY27/FY28 EBIT forecasts were adjusted by −0.6%/−0.2%/+3.2%, respectively. Key risks: Fixed Networks revenue fell 14% below expectations (partly due to portfolio streamlining), dragging on Network Infrastructure EBIT; margin pressure is expected across the full year for new products—especially in IP Networks—but should reverse upon volume scale-up; semiconductor and optical ecosystem constraints (including InP capacity) may affect demand fulfillment or delivery timelines.

Analysis framework

BofA employs a Sum-of-the-Parts (SOTP) valuation methodology for Nokia. Specifically: it applies a 32x EV/EBIT multiple to the implied FY27 EBIT of Optical and IP Networks (aligned with peer valuations for optical/IP companies), and a 10x EV/EBIT multiple to remaining businesses (midpoint of historical 6–12x range), then adds net cash to derive the €11 target price. Analytically, the report follows a logical sequence: "business segmentation → identification of growth drivers → order-to-revenue timing analysis → gross margin and operating leverage assessment → segment-level valuation." It first divides Nokia into Network Infrastructure and Mobile Infrastructure segments, then drills down into six sub-businesses—Optical Networks, IP Networks (including data center switches), Fixed Networks, Radio Networks, Core Software, and Technology Standards—to assess growth momentum and profitability individually before aggregating to group-level financial forecasts and valuation.

Methodology notes

• Valuation MethodologySOTP Valuation

  Sum-of-the-Parts (SOTP) Valuation

  Splits the company into distinct business units and assigns different valuation multiples to each based on growth profile and risk. Here, high-growth Optical/IP Networks receive a premium 32x EV/EBIT multiple, while mature businesses receive a neutral 10x multiple—reflecting differentiated growth prospects.

• Industry/Vertical Analysis FrameworkSupply-demand framework

  Design Win to Revenue Ramp Analysis

  In telecom equipment, design wins serve as leading indicators of future revenue. There is typically a multi-quarter lag between winning a customer’s design qualification and achieving volume shipment. The report tracks design win progress to anticipate future revenue timing—a demand-side analytical framework specific to this industry.

• Corporate Fundamentals & Financial FrameworkOperating/Financial Leverage Analysis

  Operating Leverage and Gross Margin Cycle

  During new product ramp-up, elevated R&D, certification, and early production costs typically depress short-term gross margins (negative operating leverage); once volumes scale and yields improve, fixed cost absorption lifts gross margins (positive operating leverage). The report treats Nokia’s near-term IP Networks margin pressure as temporary, consistent with this pattern.

Asset mapping & comparison

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

• Nokia (NOK)

  Core investment thesis: dual-engine growth from optical networking and data center switches; AI infrastructure beneficiary

  Strengths

  Leadership in optical networking technology; successful entry into U.S. hyperscaler data center switch market; robust AI/cloud order pipeline; stable cash flow from patent licensing

  Weaknesses

  Fixed Networks drag; potential customer attrition in Mobile Infrastructure; near-term gross margin pressure during new product ramp-up

  Comparison

  Compared to pure-play optical equipment vendors, Nokia offers greater diversification and more balanced growth; versus traditional telecom equipment vendors, Nokia demonstrates greater foresight in AI data center positioning

  Risks

  Slowing cloud capex; intensifying competition in optics; lower-than-expected data center switch revenue; further customer loss in Mobile Infrastructure

Key data

• Optical & IP Networks FY26 Organic Growth Guidance18–20%Previously guided at 10–12%; significant upward revision
• Optical Networks Q1 Organic Growth20% YoY3.5 percentage points above consensus
• AI/Cloud-Related Orders (Q1)€1 billionWithin Network Infrastructure; book-to-bill far above 1
• FY27–28 Revenue Forecast Adjustments+2–4%Driven by data center switch ramp-up and optical strength
• FY26/FY27/FY28 EBIT Adjustments−0.6%/−0.2%/+3.2%Short-term OpEx increase; long-term operating leverage improvement
• Target Price (Revised)€11.0 / $12.7Previous target: €10.7 / $12.4; SOTP-based
• Current Share Price€9.00 / $10.41Implies ~22% upside
• Fixed Networks Revenue vs. Expectations14% below expectationsPartially due to portfolio streamlining; drags on NI margin

Impact & implications

The report concludes Nokia is successfully transforming into a key beneficiary of AI infrastructure build-out. The breakthrough with U.S. hyperscalers on data center switches opens access to a substantially larger market than European sovereign data centers. Continued optical strength and abundant AI/cloud orders provide a clear growth path for Network Infrastructure. While near-term new product ramp-up will pressure gross margins, scale-up should ultimately yield improved profitability. Within Mobile Infrastructure, patent licensing resilience partially offsets volatility in network equipment. Overall, Nokia’s narrative is shifting from "post-5G slowdown" to "AI-driven infrastructure upgrade cycle."

Risks

• Slowing growth in cloud capex allocated to optical systems
• Intensifying competition in optics (optical systems and pluggable optical modules)
• Data center switch revenue falling short of expectations
• Further customer attrition in Mobile Infrastructure
• Persistent weakness in Fixed Networks revenue
• Semiconductor and optical ecosystem (including InP) capacity constraints affecting delivery

What to watch

• Follow-on orders and ramp-up cadence for data center switches with U.S. hyperscalers
• Revenue penetration rate of optical systems and 800G pluggable optical modules
• Recovery trajectory of Network Infrastructure gross margin post new-product ramp-up
• Progress on AI-RAN collaboration with NVIDIA
• Pace of Huawei/ZTE substitution in European markets