Nokia just announced the acquisition of Infinera (a Big Data portfolio company) for $2.3 billion, representing a 28% premium. Infinera, which is a supplier of optical semiconductors and networking solutions, will allow Nokia to increase the scale of its optical networks business and to raise its exposure to Internet/data center customers that account for roughly 30% of Infinera revenue.
We have been building positions in this optical and networking space in the last couple of months (both in the US and China), considering that valuations are very reasonable (e.g. Infinera is valued at 16x forward EPS at deal price) and that faster networking becomes a major area of spending for data centers, as commented recently by Broadcom (see our previous report).
Indeed, moving bits around in data centers is probably one of the largest limiting factors to fully exploit today’s available computing power. The use of optical data transmission is taking center stage as next generation data centers – those built to train large Generative AI models – will be even more impacted by this network/memory bottleneck. Optical transmissions allow to reduce latency and, more importantly, significantly reduce the necessary energy for data transfers, which represent about 25% of data centers’ total electric power consumption.
As the speed of networks is relentlessly increasing (we are currently in the 800Gbps rollout phase), the complexity of one of the key processes, the opto-electronic conversion, is shooting through the roof with regard to the techniques of signal processing (DSP and retimer) and the management of lasers.
This complexity is increasing R&D budgets and manufacturing costs of optoelectronic components in an environment of sluggish demand from the important telecom industry. Accordingly, optical equipment manufacturers are all chasing hyperscalers’ very competitive equipment orders, pushing the industry to further pursue its consolidation phase.
In conclusion, the Infinera deal could kick off a wave of M&A transactions in the optical space where we see most players offering a very attractive risk/reward profile: limited downside as multiples are low and weakness of some end-markets has been flagged for a while (telecoms and enterprises); significant upside if growth perks up thanks to data centers (and potential recovery in telecoms and enterprises) and if M&A materializes.
