The Gunners progressed to the knockout stages of Europe's top club competition courtesy of a 3-0 win over Olympiacos on Wednesday night which pits them against Real Madrid, Barcelona, Atletico Madrid, Wolfsburg or Zenit Saint Petersburg in Monday's draw.
Regarding who Arsenal face in the next phase, Nicholas felt that perhaps the Germans or the Russians would be a much better result than any of the three Spanish clubs.
"It's going to be tough," said Nicholas on Sky Sports.
"Atletico are probably not as good as last year, but would be favourites against Arsenal. You can get at Real but they would be strong favourites with Benzema, Ronaldo, Bale and Rodriguez.
"Ideally (they would want) Zenit or Wolfsburg."