AI-Driven Optics + Switches Dual Engine, Nokia Target Price Raised by 50%

Overview

In this report, J.P. Morgan constructs an AI revenue model for Nokia, concluding that favorable tailwinds in the optics segment and a new large data center switch order open up significant upside potential. The firm maintains its 'Overweight' rating, sharply raising the Helsinki share target price from €12.00 to €18.00 (and the ADR from $14.00 to $21.00). The core rationale is that the market consensus has yet to fully factor in Nokia’s incremental revenue from AI and cloud initiatives, particularly the sustained growth in optical network orders and the newly secured hyperscale data center switch design contracts—developments that will fundamentally reshape the company’s earnings profile and justify higher valuation multiples.

Core views

Optical networks are currently the primary driver of the AI and cloud business. In Q1 2026, Nokia booked €1 billion in AI and cloud orders, the vast majority originating from optical products. These orders largely predated the OFC 2026 conference in March 2026, where the company unveiled a suite of next-generation offerings, including 1.6T coherent pluggable modules, 3.2T coherent compact solutions, dual-sided pluggable modules, and full-bandwidth transponders—placing its product line at the forefront of the industry. Coupled with its in-house indium phosphide (InP) wafer fabrication and packaging capabilities, J.P. Morgan expects the optics business to accelerate in 2026 and maintain strong momentum into 2027. Data center switches are emerging as a new pillar of growth. Having previously secured Microsoft as an IP network customer, the report infers that Nokia has now won switch design orders from two additional hyperscale data centers, one likely being Google (the other possibly still Microsoft). The company clarified that these new orders were not included in the Q1 €1 billion tally and are expected to begin flowing through starting in Q2. J.P. Morgan projects that these two contracts could collectively contribute up to €2 billion in annual revenue, providing a second powerful engine for growth beyond optics. Earnings forecasts have been revised sharply, well above market consensus. Leveraging these two key drivers, J.P. Morgan has raised its 2026/2027/2028 revenue estimates by 1.7%/5.2%/10.2%, respectively, with EBIT projections exceeding the consensus by 1.8%/6.0%/40.1%. The 2028 EBIT forecast surpasses the midpoint of the company’s November 2025 Capital Markets Day guidance of €2.95 billion by 58%. The report contends that the long-term guidance issued just seven months earlier has become outdated, as it did not anticipate either the robust demand in the optics market or the new switch design wins. Key assumptions include: optical networks generating €4.5 billion in AI and cloud revenue by 2028 (based on annualizing the Q1 €1 billion order book and adding 12.5% growth from new products); IP networks contributing €2 billion annually through the new switch contracts; steady revenue from traditional telecom services; and mobile networks achieving a gross margin of 50%, the upper end of the guided range, through restructuring.

Analysis framework

J.P. Morgan employs a bottom-up revenue decomposition approach to build Nokia’s earnings model. The report first disaggregates the 'Network Infrastructure' segment into three sub-businesses—optical networks, IP networks, and fixed networks—and conducts separate volume‑price analyses for each. For optical networks, the baseline is the €1 billion in AI and cloud orders disclosed in Q1 2026, annualized to yield a base annual revenue of €4 billion. This is then augmented by approximately 12.5% incremental growth from the new products unveiled at OFC 2026, leading to an estimated €4.5 billion in AI and cloud revenue for optical networks by 2028. The analysis also accounts for over €1.3 billion in backlog orders, which are expected to be gradually fulfilled throughout 2026–2027. For IP networks, the report leverages the confirmed information about ‘two newly secured hyperscale data center customers,’ combined with industry clues (Nokia was certified as a Google switch supplier in 2025), to infer a combined annual revenue assumption of €2 billion from the two contracts. In terms of valuation, the report articulates a ‘paradigm shift’ from historical to forward-looking metrics: Nokia’s historical average PE stands at just 13x, with EPS declining from €0.46 in 2022 to €0.29 in 2025 (a 13% CAGR decline over three years); however, under the impetus of the AI and cloud businesses, EPS is projected to grow at a 29.2% CAGR from 2025 to 2028, signaling a fundamental transformation in the earnings profile. Consequently, the firm opts for a PEG ratio of 1x as the valuation anchor (equivalent to a 29x PE), rather than simply referencing peer averages. The report emphasizes that while peer multiples may happen to align with 29x, this is coincidental; the core basis for valuation lies in the growth trajectory itself.

Methodology notes

• Valuation MethodologyPEG Valuation

  PEG = PE / Earnings Growth Rate

  The PEG valuation method links the price-to-earnings ratio to the earnings growth rate; a PEG of 1 indicates fair valuation. In this report, J.P. Morgan believes that Nokia’s earnings growth profile has shifted from past declines to high growth driven by AI (a 29.2% CAGR in EPS from 2025 to 2028), rendering its historical average PE of 13x inappropriate. Thus, the firm applies a PEG of 1, corresponding to a 29x PE, as the valuation multiple.

• Industry/Industrial Analysis FrameworkVolume‑Price Breakdown

  Decomposing revenue growth into order volume × price (or by customer/product line)

  The report segments Nokia’s network infrastructure revenue by sub‑businesses—optical networks, IP networks, fixed networks—and further distinguishes between AI/cloud revenue and traditional telecom income within each. It then assigns growth rates and scales to each component, constructing a revenue forecast model for 2026–2028.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating Gearing

  The report notes that the market consensus underestimates Nokia’s operating leverage: as the proportion of high‑margin AI and cloud revenue rises, revenue growth will translate into even more pronounced profit expansion. This is one of the key reasons why the 2028 EBIT forecast exceeds the consensus by 40%.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  The impact of supply constraints on the pace of revenue recognition

  When projecting revenue, the report explicitly considers supply-side constraints, noting that despite strong orders in 2026, some revenue may not be fully recognized until 2028, resulting in a larger growth spurt in 2028—a reflection of how supply dynamics shape actual sales rhythms.

• Industry/Industrial Analysis FrameworkCost curve analysis

  The advantage of in‑house capacity on cost competitiveness

  The report specifically highlights Nokia’s proprietary indium phosphide (InP) wafer manufacturing and packaging capabilities, positioning its optics business to capture significant orders and sales growth while benefiting from the cost and supply security afforded by vertical integration.

Asset mapping & comparison

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

• Nokia (NOKIA.HE / NOK.US)

  Directly benefits from AI and cloud infrastructure investment: robust growth in optical network orders, newly secured switch design contracts with two hyperscale data centers, and cost/supply advantages stemming from proprietary indium phosphide capacity

  Strengths

  Vertically integrated in‑house InP wafer manufacturing and packaging; unveiled industry‑leading 1.6T/3.2T next‑generation optical products at OFC 2026; already serves major clients like Microsoft and has recently won switch orders from two hyperscale customers

  Weaknesses

  Traditional telecom (Telco) revenue assumed flat; 5G mobile networks remain in restructuring and profitability‑improvement phases; 2026 profit recognition constrained by supply factors

Key data

• Q1 2026 AI and Cloud Orders€1 billionPrimarily driven by optical products, excluding the newly acquired switch customer orders
• 2028 Forecast for Optical Networks’ AI and Cloud RevenueApproximately €4.5 billionBased on annualizing the Q1 €1 billion order book, plus 12.5% growth from new products
• 2028 Forecast for IP Networks’ New Switch Contract RevenueUp to €2 billionFrom two hyperscale data center customers (potentially including Google and Microsoft)
• 2028 Combined Optical + IP Revenue Forecast€11.213 billionNearly double the €5.84 billion in 2025, with €6.5 billion from AI/cloud and €4.713 billion from traditional telecom
• 2028 EBIT Forecast vs Consensus40.1% higherThe consensus failed to fully account for the incremental AI/cloud revenue and operating leverage effects
• 2028 EBIT vs Company Guidance Midpoint58% higherThe company’s November 2025 CMD guidance set the 2028 EBIT at €2.95 billion (midpoint), whereas J.P. Morgan forecasts €4.673 billion
• 2025–2028 EPS CAGR29.2%Compared with the -13% CAGR from 2022 to 2025, indicating a fundamental shift in the earnings profile
• Target Price (Helsinki/ADR)€18.00 / $21.00Based on a 29x PE (PEG=1), corresponding to a 2028 projected EPS of €0.62

Impact & implications

J.P. Morgan views Nokia’s earnings structure as having undergone a profound transformation. Over the past three years, EPS declined at a 13% CAGR, whereas the next three years, propelled by AI and cloud initiatives, are projected to see EPS grow at a 29.2% CAGR. This renders the historical average PE of 13x an inadequate benchmark. The firm adopts a PEG ratio of 1x as its valuation anchor, assigning a forward‑looking PE of 29x, arguing that while this multiple is elevated compared to historical norms, it is firmly supported by the projected earnings growth. For the industry, Nokia’s dual breakthroughs in optics and data center switching signify its transition from a traditional telecom equipment vendor to a key player in AI infrastructure. By 2028, optical networks are expected to contribute roughly €6.76 billion in revenue (including traditional telecom), IP networks around €4.45 billion, and the overall network infrastructure’s EBIT margin is projected to rise from 10.1% in 2025 to 21.3% in 2028. Meanwhile, the mobile networks division is focused on improving profitability, aiming to boost gross margins to the 50% guidance ceiling through restructuring.

Risks

• Weaker-than‑expected capital spending by telecom operators, leading to lower-than‑projected traditional business revenue
• Network segment facing market share erosion and competitive pressures
• Deterioration in free cash flow and net cash position

What to watch

• The concrete manifestation and customer confirmation of the newly secured data center switch orders starting in Q2 2026
• Order fulfillment and production ramp‑up of next‑generation optical products such as 1.6T/3.2T in the optical networks segment
• Progress in gross margin improvement following the restructuring of the mobile networks division (targeting 50%)
• The trend in the AI and cloud business’s book‑to‑bill ratio (projected at 1.8x in 2026, falling to 1.0x by 2028)