Nokia as an investment (Part 4)

Stocks
1043

Seems like another case of Broadcom’s situation, but with a bottle neck twist. I would presume this is in fact a massive boon for Nokia, but it might take a little while and/or Nokia’s Q2 (or some other positivity in the interim) to boost Nokia, but who knows…

The media attention around Nokia in the US is such that they might buy the dip, even immediately. We’ll see! As you see I’m very bullish about Q2, for multiple reasons!

Gemini answer:

Market Reaction Paradox

Despite comfortably beating earnings and revenue expectations, Ciena’s stock experienced slight downward pressure immediately following both reports.

This dynamic is common when a stock has rallied heavily prior to earnings. Investors focused tightly on management’s commentary regarding capacity limitations. Because Ciena’s production lines are entirely filled with backlogs stretched out into 2027, the market reacted to the reality that the company cannot physically manufacture equipment any faster to exploit the near-term AI infrastructure boom.

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1044

Who knows. It is entirely possible that the “buy Nokia, sell off significantly higher-valued assets” trend will accelerate even further—it has, in any case, been a growing trade among Wall Street portfolio managers.

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1045

@Mustathmir that is how they are reported, and I believe the targets for this year will be met. Next year, it’ll be 1,000 billion or something, and in 2028 we’ll see significantly higher figures again. These hold true as long as it feels that way. If, for instance, the cost of capital rises significantly and earnings drop (which is certainly not expected right now), there could be changes to the projected figures. Just as the figures have been revised upwards annually until now…

I need to take a closer look at Ciena’s numbers. But that +10% revenue growth in H2 versus H1 certainly doesn’t match the market’s hyper-growth expectations. This could also be a case of realism versus the hyper-growth narratives. The markets always overshoot in both directions.

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1046

In the first paragraph, you lumped Nokia in with other random companies. The correct logic is: “If data centers are being built, Nokia wins.”

Your second paragraph is an op-ed.

In the third paragraph, you’re already talking about matters of faith, meaning you’ve returned to the topic of “infrastructure.” That is the goal, and the skeptics will be pushed aside.

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1047

Well @Rosteri, there’s room for all kinds of opinions. Personally, I strive to base mine on facts and provide justifications for them. A couple or three years ago, when I talked about the stock being cheap and its future potential, there were plenty of skeptics. Now that I’m saying the pricing is starting to get fundamentally out of hand, there are still skeptics. :sweat_smile: :rofl:

One wish I have for the hypesters: please do some calculations and use them to justify why things still look good, including the valuation. Hype regarding share price increases alone doesn’t bring value to anyone. At some point, earnings will once again drive the pricing, not narratives.

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1049

Ciena’s Q2 revenue grew by 40% and cloud customer revenue by 70%, while management stated that demand still exceeds supply. Furthermore, nearly half of their revenue now comes directly from hyperscalers. What is interesting from Nokia’s perspective is that the approximately 10% H2 growth guided by Ciena appears to be more of a supply capacity constraint than a demand constraint. The company had a backlog of about $7 billion in the previous quarter, which is unlikely to have changed significantly.

Additionally, Ciena is largely dependent on external manufacturing capacity. This is where Nokia differs from Ciena. With the Infinera acquisition, Nokia gained control over its own InP (Indium Phosphide) chip technology and manufacturing capacity. Furthermore, Nokia has spoken about a massive expansion of its optical InP capacity by approximately 20-fold. If the market bottleneck in the future is manufacturing capability rather than demand, a vertically integrated player like Nokia could emerge as a relative winner.

For me, the most important message from Ciena’s report wasn’t the +10% H2 growth, but the fact that demand for AI optical infrastructure clearly exceeds supply capacity, and hyperscalers are making up an increasingly large share of the market. This also supports Nokia’s Optical Networks and IP Networks narrative, which is actually in its early stages as the order book grows while waiting for larger manufacturing capacity.

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1050

Regarding AI investments, doubts have been expressed even on this forum that the market has completely detached from the reality of fundamentals. However, the news flow over the past few weeks has been exceptionally diverse and consistent:

  • Dell reported very strong demand for AI infrastructure.
  • HPE stated that router orders grew by nearly 30%, driven by data center investments from hyperscalers.
  • Ciena reported a 40% increase in revenue and a 70% increase in cloud customer revenue, while management noted that demand continues to outstrip supply.
  • Nordea raised its price target for Nokia to 15.70 euros and estimated that the company’s 2028 earnings target might be too conservative.

Based on these points, it is difficult to argue that this is merely hype without real demand. Reasonable questions have also been raised regarding financing. At the same time, however, it is worth noting that hyperscalers are not currently behaving like companies that are scaling back investments.

As a recap, Alphabet:

  • Operating cash flow approximately 174 billion USD.
  • 2026 investment guidance up to 190 billion USD.
  • According to information reported in the market, an additional equity financing of up to 85 billion USD, primarily to support AI investments.

Alphabet is thus accelerating its investments while simultaneously seeking to secure their financing for several years ahead without excessive indebtedness.

As for Nokia, the company’s story is no longer based solely on the traditional telecom network market. The company has three significant AI pillars: Optical Networks, IP networks for hyperscalers, and in the longer term, AI-RAN and its related software. Furthermore, with the Infinera acquisition, Nokia is a more vertically integrated player in a market where production bottlenecks appear to be becoming increasingly important. While it is still impossible to know how far the tailwinds of the AI cycle will carry Nokia, I see grounds for optimism. The year 2027 will likely show much more clearly than the present how strong Nokia’s position in building AI infrastructure will ultimately become.

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1051

Many thanks and a bow to @Lexus

You have been the voice of reason, both during Nokia’s undervaluation and now perhaps during this AI hype. Keep up the good work.

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Nokia has been doing well, and this one drop doesn’t change the big picture. One shouldn’t necessarily expect a big surge immediately tomorrow either; here are 3 points known to everyone:

1. The collapse of competitor Ciena (-18%), which indicates demand issues for optical network hardware.

  1. Broadcom’s (-15%) plunge keeps the broader chip and device sector under pressure and fearful.

  2. The direction for the afternoon will be entirely determined by the US employment report released at 15:30, which dictates the market’s general risk appetite.

Many predict the weather from a frog, or from whatever else?

What if this time I suggest that I’ll predict Nokia’s future share price from an outdoor thermometer?

Is this kind of humor allowed at the end of the day;

> one could throw out a “wild guess” based on this:

** The Puolanka pessimist’s guess: Opening in the morning and swinging between €13.30–13.60 (since the temperatures there can be quite chilly in the morning)

*The Oulu optimist’s guess: we’ll go hard right from the morning, breaking €14, and by the afternoon we’ll already reach €15 → well, this is almost like a weather forecast from Oulu, at least for the morning?

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Exactly the opposite. Demand massively exceeds Ciena’s current delivery capacity. At the same time, for example, Lumentum has sold out its production capacity until the end of 2028.

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I’m repeating this, because I think it still needs to sink in for many people. There’s no hype or spin…

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If there is hype, it is coming from the hyperscalers, whose massive investments now—and apparently for the coming years—are a fact. It is also a fact that this means demand will exceed supply capacity regarding, for example, electricity and various components. Nokia is one of the clear beneficiaries.

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1058

It is also worth noting that the data center builders naturally carry the biggest business risks. In any case, the suppliers’ business will continue to grow.

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Unfortunately, this isn’t about capacity being sold out, but rather that the coherent transceiver market is still very limited mainly to frontend connections (inter-data center traffic) and only for those customers whose stack and software support coherent optics. Ciena, like Nokia, only has a coherent optics portfolio. For example, Coherent (the company) and a million other transceiver manufacturers also have traditional lasers in their portfolios.

Nokia’s (Infinera’s) ICE-D, on the other hand, is a coherent transceiver family optimized for the backend—intra-data center, short-range, ultra-low latency data transfer.

So, while the optical transceiver business is currently growing in data centers, it is primarily still through traditional bi-directional 800G and 1.6T OSFPs, which are for backend connections, inside the rack / inside the data center. The coherent optics business is growing mainly in the frontend, i.e., external data center connections—of which Nokia’s massive Google deal is a good example.

For instance, NVIDIA has now made Vera Rubin compatible with coherent backend pluggables, but CPO (Co-Packaged Optics) anywhere other than switching front-panel connections is still in the future. Google is not even moving toward CPO technology in its own system but uses OCS “mirroring.”

If and when NVIDIA moves fully to coherent lasers in both the backend and frontend, the entire interconnection business will shift from copper to optics, and from traditional connector firms like Amphenol, Molex, and TE to optical firms—but only to those who have CPO coherent optics for the entire system, from the GPU to inter-data center connections. This equals massive energy savings (25% lower power consumption than current levels), and fiber as a material is light and cheap compared to copper and doesn’t require, for example, retimer chips on the transmission line.

Nokia is the only one capable of offering the entire system. But will there be others in a year or two when the successor to Vera Rubin is announced?

A small calculation of the business case with NVIDIA, utilizing AI. Also, a bit of background on the technology whose business Nokia could capture—even as a single source if all the stars align. I know the products and the technology, so the analysis below is based on factual background information regarding what would happen if all high-speed copper were replaced by fiber.

If Nvidia successfully transitions to a fully optical GPU rack architecture, the value shift from traditional copper and electrical networking to optical interconnection content will be astronomical.

For a fully optical rack architecture to work, copper trace lines on the printed circuit board (PCB) are replaced by optical waveguides, and standard pluggable transceivers at the faceplate are replaced by co-packaged optics (CPO) right next to the ASIC.

By anchoring themselves to Nvidia’s next-generation AI stacks (like the liquid-cooled Blackwell NVL72 and the upcoming Vera Rubin architectures), Nokia stands to capture massive value across three distinct layers of the physical AI stack.

In current architectures like the Blackwell NVL72, Nvidia uses a massive copper backplane (Co-Packaged Copper) to link 72 GPUs into a single logical “Super-GPU.” This is the physical limit of copper; the cables are already incredibly stiff, heavy, and limited to less than 2 meters. For Vera Rubin, Nvidia intends to expand this single-image compute pool across multiple racks. To do this, the NVLink fabric must become fully optical.

Nokia’s Value Capture: Nvidia needs ultra-dense, ultra-low-latency optical distribution frames and short-reach switching matrices. Nokia’s expertise in high-density fiber management, automated optical patching, and ICE-D (intra-data center coherent/linear optics) gives them the perfect product portfolio to act as the “inter-rack glue.”

The Content Value: In a standard data center, networking represents roughly 10–15% of the total infrastructure cost. In an all-optical, multi-rack AI cluster, the cost of the optical interconnect fabric (the fibers, CPO connectors, and optical routing) jumps to 20–25% of the multi-billion-dollar cluster cost.

What does this look like in dollars per rack?
To put the financial scale into perspective, let’s look at how the bill of materials (BOM) changes for a next-generation AI cluster deployment:

Era Architecture Networking Component Profile Estimated Optical BOM per Rack
Hopper (H100/H200) Copper inside rack, Pluggable Optics outside. Traditional 800G optical transceivers, standard InfiniBand switches. ~$50,000 – $100,000
Blackwell (NVL72) Co-Packaged Copper backplane, LPO/Linear optics for scale-out. Ultra-dense copper wiring, high-speed 800G/1.6T OSFP pluggables. ~$150,000 – $250,000
Vera Rubin (All-Optical) Full CPO Rack Architecture + Optical NVLink. Integrated InP laser arrays, external laser sources (ELS), co-packaged optics, optical switch fabrics. $500,000+

It’s worth considering that NVIDIA is currently manufacturing one Blackwell rack every two hours…

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1060

“No tree grows all the way to heaven,” said Nokia’s then-CEO Jorma Ollila back when the company was at its peak, and he was right.

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Micron’s (MU) 12-month graph shows that it’s not about trees growing to the sky, but about AI being able to lift part of the forest to a completely new height. The four hyperscalers (Alphabet, Meta, Amazon, and Microsoft) are apparently investing a total of over $700 billion this year, and the vast majority of this is directed toward data centers and chips required by AI. And next year, the pace is estimated to accelerate further.

A year ago, Micron was seen as a boring, cyclical memory manufacturer. When AI architecture hit a bottleneck in data transfer speeds, Micron’s HBM memories became mandatory hardware. Now the company’s capacity is sold out, operating margins are hovering near 70 percent, the stock value has increased tenfold in a year, and the market capitalization just broke the $1 trillion mark.

With Infinera, Nokia has its own “golden opportunity” on the optical side. As the internal copper cables of data centers reach their physical limits, the transition to fiber optics makes Nokia’s ICE-D and CPO technologies a critical bottleneck. This is not about traditional linear growth, but about the company’s stock valuation multiples being priced at an entirely new level as demand suddenly spikes so high that it exceeds supply.

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As I see it, the risk in the market is only at its highest when those cautioning against risks start being ridiculed. AI is going to change the world quite a bit, but many investors are also going to get their fingers burnt with it. All parabolic rallies usually end in some kind of blow-off top.

Regarding Nokia, it may still be an excellent buy at the €25 level, but on the other hand, all investing always carries its own risks. Then again, one shouldn’t be afraid of a rising share price either.

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I agree - you are the voice of reason. With your experience, you certainly know most of those US cases where momentum + hype have driven the share price and valuation to high levels. And lo and behold, the company actually ends up meeting the milestones (ramps) that were expected, after which the momentum and price movement continue their upward trajectory—index buyers and such step in. Happily, the case repeats itself over and over, and the company can reach a +$1,000bn Market Cap. There are tons of these in the US.

Noksu (Nokia) is now on the early candidate list in that scene. First, of course, it faces that $100bn Mcap hurdle and, naturally, meeting valuation expectations. The first real acid test for that will be the Q2 earnings release.

But the “industrial” knowledge of who knows what, what they can do, and who has potential resides in the US. You can easily deduce this when talking to “colleague asset managers” from Wall Street. They are ready to accept a disappointment if it comes, but it won’t easily change the prevailing “industrial perception” of who knows what and who has potential until it is proven otherwise—that Noksu isn’t up to the task.