Nokia Gains Momentum with Strong Optical Performance and Data Center Switch Ramp-Up

Overview

Bank of America Securities published an updated research report on Nokia, maintaining a Buy rating and raising the target price to €11 (previously €10.7) and US$12.7 (previously US$12.4). In its Q1 earnings, Nokia significantly raised its FY26E organic growth outlook for the Optical and IP Networks segments to 18–20% (from 10–12%), primarily driven by a notable ramp-up in data center switch revenue. The company secured multiple new data center switch design wins, primarily with hyperscale cloud providers focused on the U.S. market—marking successful penetration into this large but highly competitive segment. The report notes that Nokia’s prior assumptions for data center switch revenue were largely based on European sovereign data center builds; this upgrade reflects a reassessment of opportunities in the U.S. market.

Core views

Nokia’s core growth drivers include five key areas: **Optical Networks and Hyperscaler Demand**: Optical Networks revenue grew 20% YoY, outperforming consensus by 3.5 percentage points. This segment benefits from accelerated investment by hyperscale cloud providers in optical systems and pluggable modules (particularly 800G upgrades). In Q1, the company added €1 billion in AI/cloud-related orders, with a book-to-bill ratio "well above 1," indicating strong order momentum. **Inflection Point for Data Center Switches**: A key growth driver for the IP Networks segment is the ramp-up of data center switch revenue. In Q1, Nokia secured multiple switch design wins from hyperscale cloud providers, primarily targeting U.S. data center builds. Revenue recognition is expected to ramp quarter-over-quarter starting in Q2. This breakthrough marks a shift from Nokia’s previous focus on European sovereign data centers toward broader hyperscale market penetration. **Stable Growth in Technology Standards**: Technology Standards revenue exceeded consensus by 4%, driven by new licensing agreements with customers, partially offsetting declines in other Mobile Infrastructure segments due to portfolio adjustments. **Reversible Near-Term Margin Pressure**: Nokia explicitly noted that NI gross margins will face pressure throughout the year as new products (including in IP Networks) ramp up. However, this is viewed as temporary; once scale is achieved and the product mix shifts toward higher-margin offerings, gross margins are expected to recover. **Fixed Networks Drag and Portfolio Optimization**: Fixed Networks revenue was 14% below consensus, partly due to portfolio pruning. While this negatively impacted NI EBIT (as this business historically had higher gross margins), it remains within the company’s broader portfolio optimization framework.

Analysis framework

Bank of America’s analytical framework is based on detailed segment-level performance breakdowns and validation of growth drivers: First, it examines the capital expenditure cycle of hyperscale cloud providers within the macro context. The report focuses on accelerated investments by these top-tier players in optical networking and data center infrastructure—a critical external condition enabling Nokia’s core growth. Second, it tracks revenue growth and gross margin trends by segment. For Optical Networks, analysts monitor pluggable optical modules (especially the migration from 400G to 800G), penetration rates of optical systems, and market share gains versus competitors. For IP Networks, the new data center switch revenue is seen as a pivotal inflection point, signaling a strategic shift in product mix and customer base from traditional telecom operators to cloud providers. Third, it assesses short- and medium-term profitability dynamics. While new product ramps temporarily pressure gross margins (due to underutilized capacity and high initial costs), analysts expect this to reverse based on product lifecycle theory, with ample room for margin improvement in the medium term. Finally, valuation employs a Sum-of-the-Parts (SOTP) approach. Optical and IP Networks are valued at 32x FY27E EV/EBIT (in line with peer valuations for optical/IP businesses), while all other segments are valued at 10x (consistent with their historical median range of 6–12x). This method implicitly recognizes the premium valuation warranted by high-growth optical/IP businesses.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Hyperscaler Capex Cycle and Data Center Investment

  The report closely tracks capital expenditure cycles of hyperscale cloud providers (e.g., Meta, Google, Amazon) in optical networking and data center infrastructure. These companies’ large-scale, concentrated procurement directly drives demand for Nokia’s optical systems and switches. Analysts believe we are currently in an acceleration phase of this cycle, supporting faster revenue growth for Nokia.

• Industry/Sector Analysis FrameworkProduct life cycle

  Cost and Margin Pressure During New Product Ramps

  New IP Network products (especially data center switches) are in the early stages of large-scale commercialization. Analysts apply product lifecycle theory to explain why gross margins are pressured short-term (due to underutilized capacity and immature cost learning curves) but are expected to improve in the medium term. This helps investors distinguish between temporary noise and longer-term trends.

• Valuation MethodologySOTP (Sum-of-the-Parts) Valuation

  SOTP Applied to Multi-Business Conglomerates

  Nokia operates across multiple business lines—Optical Networks, IP Networks, Fixed Networks, Mobile Networks—with varying profitability and growth profiles. Analysts value high-growth segments (Optical/IP) at 32x and the rest at 10x, then sum the parts to derive total company value. This approach more accurately captures growth premiums embedded in specific segments.

• Company Fundamentals & Financial FrameworkVolume-price decomposition

  Decomposing Revenue Growth into Volume (Orders, Shipments) and Price (Product Mix, Pricing)

  The report emphasizes that data center switch revenue growth stems from increased design win volume and subsequent scale ramps, while optical systems benefit from higher-value pluggable modules. This volume-price decomposition helps investors assess the sustainability and marginal momentum of growth.

Asset mapping & comparison

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

• Nokia (NOK.US / NOKBF)

  Direct beneficiary. Upward revisions to Optical Networks and data center switch revenue growth are primarily driven by accelerated capex from hyperscale cloud providers.

  Strengths

  Strong market position in optical systems and pluggable modules; incremental opportunities from 800G upgrade cycle; multiple data center switch design wins with hyperscalers; successful U.S. market penetration; stable profit contribution from Technology Standards; Mobile Infrastructure, though under near-term pressure, retains portfolio optimization potential

  Weaknesses

  Fixed Networks revenue 14% below expectations; Mobile Infrastructure segment showing stagnant or negative growth; near-term gross margin pressure from new product ramps; facing intense competition (especially in optical and switch segments) for market share

  Risks

  Supply chain capacity constraints (InP chip capacity may limit optical product deliveries); potential slowdown in hyperscaler optical spending; intense competition in data center switches may threaten market share retention; slower-than-expected progress in Europe/Huawei/ZTE replacement scenarios

Key data

• FY26E Growth Forecast Upgrade for Optical & IP NetworksRaised from 10–12% organic growth to 18–20%Upgrade exceeds 8 percentage points, primarily driven by data center switch ramp-up
• Q1 YoY Growth in Optical Networks20% YoY organic growth3.5 percentage points above consensus, reflecting strong momentum in optical systems and pluggable modules
• Q1 AI/Cloud Order Value€1 billionNew orders reflect accelerated hyperscaler investment; book-to-bill ratio well above 1
• FY27–28E Revenue Forecast Upgrade2–4%FY27E revenue raised from €21,372M to €21,856M; FY28E from €22,157M to €23,000M
• FY26–28E EBIT ChangesFY26E -0.6% / FY27E -0.2% / FY28E +3.2%Short-term EBIT slightly downgraded due to margin pressure; medium-term improvement expected from scale effects
• Target Price Upgrade€11.00 (from €10.70) / US$12.70 (from US$12.4)Based on SOTP: Optical/IP at 32x FY27E EV/EBIT; other segments at 10x
• Fixed Networks Revenue14% below consensusDue to portfolio pruning and asset divestitures, but aligned with portfolio optimization strategy
• Mobile Infrastructure Gross Margin OutlookPressure throughout the year, expected to improve laterHigh initial costs during new product ramps; margin recovery expected as volumes scale

Impact & implications

This report redefines the scope and timeline of Nokia’s growth narrative: **Expanded Market Penetration**: Nokia has successfully expanded beyond European sovereign cloud infrastructure into the global hyperscaler supply chain. This not only increases addressable market size but also elevates Nokia’s position in the global data center ecosystem. Design wins in data center switches validate its competitiveness in this space. **Enhanced Growth Sustainability**: The shift from modest growth expectations (10–12%) to accelerated growth (18–20%) reflects not just short-term order volatility but a fundamental reassessment of the medium-term (2026–2027) revenue trajectory. This signals both near-term outperformance and robust medium-term momentum. **Margin Risks and Opportunities**: Near-term gross margin pressure is an inevitable cost of new product ramps, but analysts—based on industry dynamics—believe this is reversible. If Nokia executes well on scaling switch production and cost control, EBIT expansion potential in 2027–2028 is significant. **Valuation Re-rating**: The target price was raised by 3% in EUR terms (and more in USD due to FX), with the new SOTP framework assigning a 32x multiple to Optical/IP Networks—implying market recognition of a premium for high-growth businesses. As long as growth expectations hold, upside valuation revision remains possible. **Risk Balance**: The report also highlights downside risks: supply chain bottlenecks (especially InP capacity), potential slowdown in hyperscaler optical spending, and intensifying competition. However, the upside drivers—hyperscaler penetration, new product ramps, and margin recovery—are deemed to carry greater weight.

Risks

• Supply Chain Capacity Constraints: Bottlenecks in chips and optical components (particularly InP capacity) could delay deliveries or constrain demand realization
• Hyperscaler Optical Spending Slowdown: If hyperscale cloud providers decelerate or defer optical networking investments, Optical Networks revenue growth may fall short of expectations
• Data Center Switch Competition: Despite design wins, intense competition may pressure shipment volumes and margins in subsequent phases
• Mobile Infrastructure Customer Attrition: The report already flags customer loss risk in this segment; further deterioration could weigh on overall performance
• Delayed Margin Recovery: Poor cost control or lower-than-expected capacity utilization during new product ramps could push back or weaken gross margin improvement

What to watch

• Q2 and subsequent quarterly revenue recognition and shipment progress for data center switches: whether the planned sequential ramp occurs as scheduled
• Gross margin trends in Optical and IP Networks: when cost improvements and scale effects from new product ramps become visible
• Hyperscaler capex cycle: whether investment intensity and order flow remain robust
• Stability of Mobile Infrastructure: whether customer attrition is contained and growth stabilization is achieved
• Relief of chip and optical capacity bottlenecks: whether supply of InP and other critical components improves