Not Intel. Not CoreWeave. This Underappreciated Nvidia-Backed Company Is Growing Artificial Intelligence (AI) Revenue by 123%. Here's Why It's a Buy Today for $8.

Key Points

• Nvidia is using the record profits it has earned to invest in other companies that help it grow its artificial intelligence (AI) business.

• Last October, Nvidia invested $1 billion in Nokia to help build wireless networks that use AI.

• Nokia's fastest-growing business now comes from customers in AI and cloud computing.

When most investors think of Nokia (NYSE: NOK), they probably remember the large, sturdy mobile phones the company made many years ago. Those phones helped make mobile devices popular. But the Finnish company is now changing in a big way, and artificial intelligence (AI) is a major part of that change.

Nokia has spent years building the systems that connect mobile phones and move information between devices. Now that companies are spending heavily on AI technology, Nokia is using those systems and its experience to become a supplier of networking equipment for AI.

One of the biggest supporters of this plan is Nvidia (NASDAQ: NVDA). Nvidia has invested in several companies that are important to the technology industry. These include chip companies and chip manufacturers like Intel, as well as newer cloud computing companies like CoreWeave. But I think Nvidia's partnership with Nokia could turn out to be its most profitable one.

The giant chip company invested $1 billion in Nokia last year. This created a partnership that could change how the telecommunications industry works. After Nokia released its third-quarter financial results, investors got new signs that the company's move toward AI is picking up speed.

How Nokia is changing from phones to AI

Last October, Nvidia invested $1 billion in Nokia and bought a 2.9% ownership stake in the company. The two companies are working together on artificial intelligence radio access networks, or AI-RAN. These networks combine regular wireless communication equipment with powerful computers that can process information quickly. In simple terms, Nvidia and Nokia want to turn wireless networks into connected systems that can also run AI.

This matters because much of today's AI technology runs inside large buildings filled with computers, called data centers. But newer uses of AI, such as self-driving vehicles, robots, automated factory machines, and internet-connected devices will need AI to work closer to where information is collected. This is called edge AI. According to information collected by research company Omdia, the market for AI-RAN technology is expected to grow to more than $200 billion by 2030.

Nokia's financial results show where its biggest growth is coming from

In the third quarter, Nokia brought in 5.2 billion euros in revenue, meaning the money it earned from sales. At first, this might not seem very exciting. Revenue grew by only 9% compared with the same quarter a year earlier, when changes in currency exchange rates are taken out. But operating profit, which measures earnings from the company's main business activities, rose 35% to 605 million euros. Earnings per share (EPS), which show how much profit belongs to each share of stock, increased 50% to 0.09 euros.

The strongest results came from Nokia's AI & Cloud business. Revenue from these customers jumped 123% compared with a year earlier, reaching 631 million euros. The value of new orders increased 118%. During the quarter, Nokia received about 1.5 billion euros in new orders.

Another important detail is Nokia's purchase of Infinera. This deal helped Nokia improve its optical networking technology, which uses light to move large amounts of information very quickly. It also made Nokia better able to provide the fast connections that AI systems need. Nokia's role in building AI technology should not be overlooked. The company is working with businesses including Alphabet, which is planning a 13 billion-euro investment in Finland. Nokia is also working with major telecommunications companies such as Zayo and newer cloud computing providers that are building connections for AI inference, which is when a trained AI system uses what it has learned to produce answers or make decisions.

Is Nokia stock worth buying?

I think the biggest reason to feel positive about Nokia's future is its place in the larger group of companies that supply the equipment needed for AI. When investors think about the money that Amazon, Microsoft, Alphabet, and Meta Platforms are spending to build AI technology, they usually focus on graphics processing units (GPUs) and memory chips. This spending on equipment and other long-term assets is called capital expenditures, or capex.

But building AI systems requires more than computer chips. As hyperscalers, meaning companies that operate very large computing systems, build more data centers, they also need fast optical networking equipment. This equipment moves information between computers and helps them work together.

In other words, the companies supplying the basic tools needed to build AI are not just chipmakers. These pick-and-shovel suppliers of AI also include companies that make networking equipment, optical systems, and the connections that keep data centers running. Nokia is well placed to benefit from this need.

I think many investors are overlooking this part of the AI investment opportunity. A lot of people understand why Nvidia makes money when large cloud computing companies buy GPUs. But they may not realize how much money is also going to the companies that provide the networks and connections those GPUs need.

Nokia currently has a price-to-sales (P/S) ratio of about 2.6. This means investors are paying about 2.6 times the company's yearly sales for its stock. At that price, I think Nokia is an attractive AI infrastructure investment for people who plan to hold shares for a long time. Wall Street analysts expect spending by large cloud computing companies to keep growing faster. Because of that, Nokia's growth from AI may still be in its early stages. I believe investors could have a meaningful chance to make money by buying Nokia shares and holding them as more AI infrastructure is built.

Adam Spatacco owns shares in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool owns shares in and recommends Alphabet, Amazon, Intel, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy that explains its investment interests and recommendations.