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AI data center investments in the UK and other countries could pay off handsomely for the Finnish vendor.
It has taken Keir Starmer, the UK's embattled prime minister, about six months in office to realize he cannot keep blaming his predecessors, the Conservatives, for the dire state of the country's economy, and that he needs a revival plan. Having read a thing or two about the artificial intelligence (AI) gold rush in the business pages, Starmer now reckons AI could do for the UK what deregulated financial services did for it in the 1980s. The technology is to be "unleashed," said a government statement this week, as Starmer opts for the same approach to caution as Ross Kananga, the stuntman who used crocodiles as stepping stones in Live and Let Die.
Why unleashed? Uncaged would have sounded deadlier, but authorities could have said something bland like introduced. Starmer probably thinks AI will be a well-trained border collie that he can let off its chain to steer the bumbling masses around potholes in the roads (pothole spotting really is identified as an AI application in the government statement). But unleashed conjures up an image of police Rottweilers being freed to run people down.
Regardless, the UK's new economic plan would demand a huge investment in AI infrastructure, and specifically the big data centers normally associated with the likes of AWS, Google and Microsoft. This obviously sounds great for Nvidia, the maker of the graphical processing units (GPUs) deemed essential to AI. But it could also be good for the vendors of connectivity products used inside and between those facilities. And they include Nokia.
The Finnish vendor is a notable figure in this market for several reasons. It is, for a start, one of the world's largest suppliers of network equipment, rivaled only by Huawei, Ericsson and Cisco. For a few years, it has also lacked an obvious growth story. In 2021, that was supplied by the fixed networks part of the network infrastructure business group, as telcos spent on last-mile fiber to cope with soaring broadband use amid lockdowns. Fixed network sales grew 35%, to nearly €2.4 billion (US$2.5 billion), that year. But for the first nine months of 2024, they fell almost a tenth year-over-year, to €1.6 billion ($1.6 billion), and every other large business group was also in decline.
The optics look good
The bits to look out for this year are probably not mobile or cloud and network services but the two other parts of network infrastructure – IP networks and optical networks. As AI data centers are built in the UK and elsewhere, their owners are relying on high-speed optical technologies to connect them and their components. Just six vendors account for 85% of that optical equipment market, and three of them are Chinese. That leaves Ciena, Nokia and Infinera as the geopolitically acceptable alternatives. But the options are due to shrink, because Nokia is buying Infinera in a $2.3 billion deal.
It could turn out to be a smart move by Pekka Lundmark, Nokia's CEO, who talked up the AI rationale for the deal when it was announced last June. "AI is driving significant investments in data centers at the moment and one of the key attractions of this acquisition is that it significantly increases our exposure to data centers," he said at the time.
But Nokia also has exposure through its IP networks unit, as well as important contracts to flaunt with at least three of the data center companies identified in this week's UK government update. Besides using optical for interconnection, AI data centers have seized hold of a technology called Infiniband to link clusters of GPUs. But ever since it bought Infiniband specialist Mellanox for about $7 billion in 2019, Nvidia has been the only company selling Infiniband products. That is now driving many data centers toward the connectivity alternative of Ethernet, which is offered by numerous suppliers. And Nokia is among them.
In December, it landed a deal to provide Ethernet-based technologies for an AI data center in the Norwegian city of Stavanger. Its operator, Nscale, is a UK company and one of several data center investors named by the UK government this week. It has agreed to invest £2.5 billion ($3 billion) over the next three years in AI infrastructure for the UK, including a data center in Essex.
Nokia also caters to Kyndryl, an IBM offshoot, and CoreWeave, two other data center companies active in the UK. Kyndryl, according to the government update, has promised to create 1,000 AI-related jobs at a hub in Liverpool over the next three years, while CoreWeave has already spent £1 billion ($1.2 billion) on setting up UK data centers in Crawley and London. Among the hyperscalers – obvious targets for Nokia – AWS plans a five-year investment of £8 billion ($9.7 billion) in UK data centers.
Rottweilers and sheepdogs
European Union officials seem more worried than Starmer that "unleashed" AI could turn out to be a vicious Rottweiler rather than a docile sheepdog. Nevertheless, the global market for AI data centers is exploding. Synergy Research, which monitors public cloud providers, says hyperscale operators already have more than 1,100 major data centers in operation worldwide and that at least another 500 are expected to come online in the next four years. This could, then, be a lucrative opportunity for Nokia.
Including Infiniband and Ethernet, the market for AI networking products is expected to generate sales of about $10.6 billion in 2027, up from just $2 billion in 2022. This, at least, was the finding of a report in August 2023 by equity analysts at Rosenblatt, which drew heavily on data from 650 Group and Bloomberg. At the time it was published, the Ethernet share of that was expected to grow from just a few hundred million dollars in 2022 to more than $6 billion in 2027.
Nokia, of course, does not enjoy the monopoly that Nvidia does in the Infiniband sector. It is likely to face strong competition from Arista and Cisco, among others. And while the data center market may be set for growth, Nokia's sales of IP networking products to telco customers have recently been in decline. Overall revenues at the IP networks unit fell almost 10% year-over-year for the first nine months of 2024, to €1.76 billion ($1.8 billion). That said, they were up 6% on a constant-currency basis for the third quarter, thanks to contracts in the data center market.
As for the optical outlook, Nokia draws on data from Omdia, a Light Reading sister company, predicting market revenues will increase at a compound annual growth rate of 5% between 2023 and 2029. This would put annual sales at nearly $16 billion by then. But there will be inevitable competition from major Chinese vendors in some parts of the world, while Ciena remains a daunting rival elsewhere. Nokia's optical business has also been the worst performing of all its various units, with sales down 23% year-over-year, to about €1.1 billion ($1.1 billion), for the first nine months of 2024. A recovery in this sector lags the third-quarter improvements seen at IP networks and fixed networks, said Nokia.
Perhaps the biggest disappointment is that Nokia is not doing better outside the telecom sector. Sales to other types of "enterprise" customers fell 4% on a constant-currency basis for the first nine months of 2024, to less than €1.5 billion ($1.5 billion), compared with the same period of 2023. That recent drop followed double-digit annual growth in 2022 and 2023. Yet enterprise's share of total revenues has risen from just 7% for 2021 to 11.3% for the first three quarters of 2024. Amid ongoing despondency about the wider communications market, the current AI boom would seem like the best opportunity Nokia has.
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