Nokia’s AI side hustle can offset its telco torpor
By Jennifer Johnson
Nokia 
NOKIA is no stranger to reinventing itself. The Finnish group started life as a pulp mill in the mid-19th century before turning its hand to mobile phone manufacturing and telecoms networks. Expertise in the latter has left it poised to benefit from the AI-driven boom in data centre development. Rival Ericsson 
ERIC_A doesn’t play in this area – meaning Nokia arguably merits its richer valuation.
The duo’s main business, building infrastructure for telco operators like Vodafone 
VOD, is in the doldrums. According to market researcher Dell’Oro, sector capex could decline by 2% annually for the next three years. Analysts polled by Visible Alpha expect Ericsson’s total revenue to be just over 22 billion euros in 2028, barely an improvement on the 21.5 billion euros it made last year. Operators may start mulling investments in 6G, the next generation of mobile networks, by 2030. But given 5G hasn’t exactly delivered stellar returns, that’s not guaranteed.
The Finnish group’s $2.3 billion takeover of Infinera, which closed early this year, gives it a more promising string to its bow. It’s now one of the world’s top manufacturers of optical transport systems – a foundational bit of data centre infrastructure, which enables the mass movement of traffic via light and fibre optic cables. In the third quarter of this year, Nokia said it generated 6% of sales from hyperscalers – the giants of AI computing infrastructure – up from 5% in the prior quarter.
That may not sound like a lot, but hyperscalers’ breakneck growth makes them much more promising customers than telcos. Analysts polled by Visible Alpha predict Nokia’s network infrastructure division, which houses its optical networks and other AI-linked kit, will be the largest contributor to group revenue this year. This would be the first time since 2017 that it outperformed the mobile networks business in sales terms – and it’s a trend that is likely to continue.
The upshot is a faster overall growth profile. Nokia could see net sales tick steadily upward from 19.5 billion euros in 2024 to 21.5 billion euros in 2028, per Visible Alpha estimates. Nokia CEO Justin Hotard said on Thursday the company’s biggest opportunity “is clearly in the hyperscalers and the neoclouds” – the latter being providers of AI computing power.
Investors have already cottoned on. After a 50% share price jump since July, Nokia now trades on almost 17 times its projected earnings for the next 12 months, per an LSEG poll of analysts, while Ericsson is on 13 times. That puts the Finnish group much closer to enterprise networking specialist Cisco 
CSCO, which has significant AI infrastructure exposure, at close to 17.5 times forward earnings. While Ericsson has recently made progress by cutting costs, Nokia’s modest foray into AI is rather more inspiring.
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CONTEXT NEWS
Nokia on October 23 reported third-quarter earnings that exceeded market expectations, sending shares to a three-year high of around 5.3 euros. Operating profit in the three months to the end of September was 435 million euros, significantly higher than the 342 million euros forecast by an LSEG poll of analysts.
The group’s network infrastructure division delivered net sales growth of 11%, driven by demand from AI and cloud customers. Meanwhile its mobile networks division saw revenues tick up by 4% on a constant currency basis.
Nokia shares rose 10.8% to 5.2 euros on October 23.
