Nokia Oyj (NOK)

Executive Summary / Key Takeaways

• The AI supercycle is transforming Nokia from a cyclical telecom equipment provider into a secular growth infrastructure play, with AI and cloud customers already representing 6% of group sales and driving 19% growth in optical networks.
• NVDA's $1 billion equity investment at $6.01 per share validates Nokia's strategic repositioning and provides both capital and credibility for the company's AI-driven transformation, creating a floor under the stock while accelerating R&D in 6G and data center connectivity.
• Portfolio optimization through divestitures (submarine networks) and acquisitions (Infinera (INFN), Rapid) is creating operational leverage, with management targeting EUR 2.7-3.2 billion in operating profit by 2028, representing a 60% increase from current levels.
• Mobile Networks is stabilizing after years of decline, with defense and private wireless emerging as high-margin growth vectors, while Cloud & Network Services has achieved market leadership in 5G standalone core with 70% share outside China.
• Despite EUR 230 million in currency headwinds and EUR 50-80 million in tariff impacts for 2025, Nokia's EUR 3 billion net cash position and EUR 2 billion annual free cash flow generation provide ample cushion to execute the transformation while maintaining shareholder returns.

Setting the Scene: From Finnish Conglomerate to AI Infrastructure Pure-Play

Nokia Oyj, founded in 1865 and headquartered in Espoo, Finland, has undergone one of the most remarkable corporate transformations in industrial history. What began as a paper mill evolved into the world's dominant mobile phone manufacturer, then collapsed, and subsequently rebuilt itself into a telecommunications infrastructure leader. This history explains management's DNA: resilience through reinvention. The 2015 Alcatel-Lucent acquisition and dual listing in Paris represented the company's last major pivot toward network infrastructure; the 2024-2025 period marks an equally significant strategic inflection.

Today, Nokia generates revenue through four distinct but synergistic segments. Network Infrastructure (NI) provides the physical connectivity layer—optical networks that move data at terabit speeds, IP routers that direct traffic, and fixed networks that bring fiber to homes and enterprises. Mobile Networks (MN) supplies the radio access equipment that powers 5G and eventually 6G cellular connectivity. Cloud & Network Services (CNS) delivers the software brains: cloud-native 5G core platforms, network APIs, and private wireless solutions. Nokia Technologies monetizes the company's 20,000+ patents through licensing to device makers, automakers, and IoT players.

The industry structure has shifted dramatically. The 5G rollout cycle is maturing, creating a replacement market rather than a growth market for traditional radio equipment. Simultaneously, the AI revolution is driving exponential demand for data center connectivity, with hyperscalers like Microsoft (MSFT) and Meta (META) projecting massive CapEx increases in 2025. Nokia sits at the intersection of these trends: while its Mobile Networks segment faces cyclical headwinds, its Network Infrastructure business is capturing the AI-driven bandwidth explosion. This positioning transforms Nokia from a GDP-growth proxy into a secular AI beneficiary, fundamentally altering its earnings multiple potential.

Technology, Products, and Strategic Differentiation: The AI Connectivity Moat

Nokia's competitive advantage in the AI era rests on three technological pillars that collectively create a defensible moat. First, its optical networking leadership is delivering 800-gigabit ZR and ZR+ coherent pluggables that shipped to the first hyperscale customer in Q3 2025. Data center interconnects are becoming the bottleneck in AI training clusters; Nokia's solution reduces power consumption and latency while increasing bandwidth by 8x compared to previous generations. The 19% growth in optical networks and book-to-bill ratio well above 1 indicate demand is accelerating, not peaking.

Second, the EUR 100 million annual investment in IP Networks targets EUR 1 billion in incremental sales by 2028, specifically addressing hyperscalers, telco cloud, and enterprise segments. This is a direct assault on Cisco (CSCO)'s dominance in data center switching. Nokia's advantage lies in its SR Linux network operating system, which Super Micro (SMCI) is adopting for its 800 gig Ethernet switches, and its compatibility across optical, IP, and fixed products. As Marco Wiren noted, "customers want to buy those, those actually work well together." This integration advantage allows Nokia to win design wins that pure-play competitors cannot, creating stickiness and higher margins.

Third, the 5G core stack has achieved a dominant 70% share of standalone deployments outside China, with CNS becoming the voice core market leader in H1 2025. The core network is the control plane for all 5G services, and Nokia's cloud-native architecture enables operators to monetize network APIs through its Network as Code platform, which now has 57 partners including Google (GOOGL) and Infobip. The subscription-based pricing model creates recurring revenue streams with 93% gross margins, fundamentally improving the quality of earnings compared to the legacy appliance model still used in Mobile Networks.

The NVDA partnership announced in October 2025 represents strategic validation, not just capital. NVDA's $1 billion investment at $6.01 per share—effectively at market price—signals confidence that Nokia's 5G and 6G software stack running on NVDA chips will create a differentiated solution for AI-driven networks. This collaboration on next-generation cellular technology positions Nokia as the connectivity layer for AI factories and edge computing, capturing value from the AI supercycle rather than being displaced by it.

Financial Performance & Segment Dynamics: Evidence of Transformation

Nokia's Q3 2025 results provide clear evidence that the strategic pivot is working. Group net sales grew 9% year-over-year with all four business groups contributing, a stark contrast to Ericsson (ERIC)'s 9% decline. This demonstrates Nokia's diversification is paying off while competitors remain tethered to the cyclical RAN market. The EUR 429 million in quarterly free cash flow and EUR 3 billion net cash position provide the financial flexibility to invest through cycles while returning capital via dividends (EUR 0.14 per share proposed for 2024, up from EUR 0.13).

Network Infrastructure delivered 11% growth, with optical networks surging 19% and the AI/cloud segment reaching 14% of NI sales and 6% of group sales. The INFN acquisition, closed in Q1 2025, contributed positively to operating profit in Q3 and is ahead of schedule on synergy realization. Management expects EUR 200 million in run-rate operating profit synergies by 2027, which transforms a dilutive acquisition into an accretive growth engine. The 190 basis point gross margin decline in NI is temporary, driven by product mix as hyperscale customers initially purchase lower-margin pluggables before scaling to full systems; the sequential margin improvement from Q2 suggests this headwind is abating.

Mobile Networks grew 4% in Q3, a meaningful inflection from the 13% decline in Q2 that was distorted by prior-year contract settlements. The segment faces a 4 percentage point headwind from an AT&T (T) decision made in 2023, yet underlying demand is stabilizing. The EUR 120 million one-time charge in Q1 related to a 2019 project is historical cleanup, not ongoing risk, as Justin Hotard clarified: "We don't see risk with other customers." More importantly, defense is emerging as a growth vector, with the 5G tactical radio solution launched in Q4 2024 and Banshee Radio units delivered to the U.S. Marine Corps. Defense contracts carry higher margins and longer cycles, providing stability to the segment.

Cloud & Network Services grew 13% with 380 basis points of gross margin expansion, demonstrating the power of the cloud-native software model. The transfer of Managed Services from CNS to Mobile Networks (EUR 430 million sales, EUR 40 million profit) simplifies CNS into a pure software business, improving margin transparency and valuation multiples. With 5G standalone core penetration still below 30% globally, the runway for growth extends for years.

Nokia Technologies maintains a EUR 1.4 billion annual run rate with EUR 1.1 billion operating profit expected for 2025. The strategic review to scale down passive venture fund investments and focus on direct minority investments like Endscale eliminates EUR 90 million in annual currency volatility from the venture portfolio while concentrating capital on strategic accelerators. This is capital allocation discipline in action.

Outlook, Management Guidance, and Execution Risk

Management's revised 2025 guidance of EUR 1.6-2.1 billion in comparable operating profit, down from the initial EUR 1.9-2.4 billion range, reflects external headwinds rather than operational deterioration. The EUR 230 million currency impact from the euro strengthening to 1.17 against the dollar and EUR 50-80 million in tariff costs are quantifiable and temporary. Nokia is tracking toward the midpoint of this reduced range, indicating underlying business momentum remains intact.

The long-term target announced at the November 2025 Capital Markets Day—EUR 2.7-3.2 billion operating profit by 2028—implies a 60% increase from the EUR 2.0 billion generated in the trailing twelve months. This ambition is supported by three drivers: (1) EUR 200 million in INFN synergies, (2) EUR 1 billion in incremental IP Networks sales from the EUR 100 million annual investment, and (3) continuous productivity improvements replacing large restructuring programs. The target replaces prior long-term guidance, signaling management's confidence in the new strategy.

Q4 2025 is expected to grow sequentially "slightly above the historical seasonality of 22%," with stronger backlog coverage than in recent years. Nokia's business is historically back-end loaded, and robust Q4 performance would validate the full-year guidance and set up 2026 momentum. The AI and cloud customer segment, at 6% of group sales, is growing fast enough to become a double-digit contributor by 2026, fundamentally altering Nokia's growth profile.

Execution risks center on three areas. First, the INFN integration must deliver the promised synergies without disrupting customer relationships. Second, the IP Networks investment must convert to design wins and revenue, competing against entrenched players like CSCO. Third, Mobile Networks must stabilize despite the T headwind and grow defense/private wireless fast enough to offset traditional RAN weakness. The EUR 3 billion net cash position provides margin for error, but execution missteps would delay the margin inflection and compress the multiple.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is competitive displacement in the AI infrastructure layer. While Nokia has first-mover advantage with 800G pluggables and NVDA partnership, CSCO, Arista (ANET), and Juniper (JNPR) are not standing still. If hyperscalers standardize on alternative architectures or develop in-house solutions, Nokia's growth engine could stall. The AI/cloud segment's 19% growth is pricing in continued share gains; any reversal would disproportionately impact valuation given the segment's high margins.

Customer concentration remains a structural vulnerability. The T decision created a 4 percentage point headwind for Mobile Networks, and similar moves by other major operators could derail the stabilization narrative. While defense and private wireless diversification mitigates this, they remain small relative to the EUR 10+ billion RAN business. A major operator bankruptcy or shift to Open RAN with alternative vendors would pressure both revenue and margins.

Geopolitical risks cut both ways. Chinese vendor restrictions in Western markets benefit Nokia today, but any relaxation of sanctions or development of EUV-independent silicon by Huawei could reintroduce aggressive price competition. Conversely, escalation of trade tensions could expand tariffs beyond the current EUR 50-80 million impact, compressing margins further. The company's manufacturing presence in Wisconsin provides some protection for U.S. government contracts, but global supply chains remain exposed.

The EUR 230 million currency headwind illustrates Nokia's operational leverage. Every $0.01 movement in EUR/USD impacts operating profit by EUR 10-15 million. With the euro at 1.17, further strengthening would pressure guidance, while weakening would provide upside. Currency is outside management's control yet directly affects the ability to hit targets that drive compensation and investor confidence.

On the positive side, asymmetries exist in three areas. First, if the AI supercycle accelerates beyond expectations, Nokia's optical and IP networks could see demand inflection similar to the 5G boom, driving double-digit group growth. Second, defense spending on tactical communications could scale faster than the modest expectations built into guidance, given NATO's focus on 3GPP-based solutions. Third, the INFN integration could exceed the EUR 200 million synergy target, as Q3 performance suggests, providing upside to 2026-2027 margins.

Competitive Context and Positioning

Nokia's competitive position is best understood through segment-level comparisons. In optical networks, Nokia is gaining share against Ciena (CIEN) and INFN (now acquired), with 19% growth outpacing the market. The 800G pluggable advantage reduces customer power consumption and space requirements by 50% versus traditional transponders, creating a TCO argument that justifies premium pricing. This is why the book-to-bill ratio remains above 1 despite supply chain constraints easing.

In IP networks, Nokia is a "fairly small player" by Justin Hotard's own admission, well behind CSCO and JNPR. However, the EUR 100 million investment targeting EUR 1 billion in incremental sales by 2028 implies a 10x revenue multiple on investment, achievable only if Nokia captures share in the AI-driven data center buildout. The SMCI partnership and Endscale investment create channel leverage that pure-play router vendors lack, potentially accelerating market penetration.

Mobile Networks competes in a four-player global market with ERIC, Huawei, and ZTE. Nokia's 18,000 net new base station sites won in 2024, including 12 new RAN customers, demonstrates competitive traction. However, ERIC's 25-30% RAN market share outside China exceeds Nokia's, and its 48.1% gross margin in Q3 2025 compares favorably to Nokia's 41.1% in Mobile Networks. The difference reflects ERIC's scale and focus; Nokia's diversification into defense and private wireless is a strategic choice to accept lower RAN margins for higher-growth adjacent markets.

The patent portfolio in Nokia Technologies provides a unique moat. With 70% of 5G standalone core deployments outside China using Nokia's stack, the company can monetize essential IP even where it doesn't win equipment contracts. This is why the EUR 1.4 billion run rate is stable and growing in automotive, IoT, and multimedia. Competitors like ERIC have IP portfolios but lack Nokia's breadth across mobile, fixed, and optical standards.

Valuation Context

At $6.17 per share, Nokia trades at 1.5 times trailing sales and 18 times free cash flow, a significant discount to pure-play AI infrastructure peers. ERIC trades at 1.3 times sales but generates higher operating margins (13.9% vs 6.9%), reflecting its focus and scale. The valuation gap prices Nokia as a legacy telecom equipment provider rather than an AI beneficiary, creating potential upside if the transformation narrative gains traction.

The balance sheet strength—net cash of EUR 3 billion and debt-to-equity of 0.21—provides strategic optionality. Nokia can invest in R&D, make acquisitions, or return capital through dividends (2.56% yield) and buybacks. The EUR 0.14 per share dividend proposal for 2024, while modest, signals confidence in cash generation. The payout ratio of 87% appears high but reflects the one-time impacts in 2025; underlying free cash flow conversion of 50-80% of operating profit provides coverage.

NVDA's investment at $6.01 per share establishes a valuation floor near current levels. The 2.9% stake is small enough to avoid strategic complications but large enough to align incentives. The partnership's focus on adapting Nokia's 5G/6G software to NVDA's chips could create a bundled solution that commands premium pricing, potentially expanding Nokia's addressable market beyond traditional telcos to AI factories and edge computing.

The enterprise value of $32.4 billion represents 11.1 times EBITDA, reasonable for a company targeting 60% profit growth by 2028. If Nokia achieves the EUR 2.7-3.2 billion operating profit target, the multiple compresses to 8-9 times, assuming modest multiple expansion. This asymmetry—limited downside given cash generation and NVDA validation, significant upside if AI strategy executes—defines the risk/reward.

Conclusion

Nokia stands at an inflection point where the AI supercycle is transforming its business model from cyclical telecom equipment to secular infrastructure growth. The NVDA partnership validates this strategic pivot, providing both capital and technological alignment for the 6G and AI edge computing era. While currency and tariff headwinds create near-term noise, the underlying momentum in optical networks, 5G core leadership, and defense opportunities demonstrates a company executing a deliberate portfolio transformation.

The investment thesis hinges on two variables: the pace of AI-driven data center spending and Nokia's ability to capture share in this market while stabilizing its traditional Mobile Networks business. The EUR 3 billion net cash position and EUR 2 billion annual free cash flow provide ample cushion for execution missteps, while the INFN integration and IP Networks investment create visible pathways to the EUR 2.7-3.2 billion operating profit target by 2028.

Trading at 18 times free cash flow with a 2.9% shareholder in NVDA, Nokia offers a compelling risk/reward profile. The stock prices in modest expectations, leaving significant upside if the AI infrastructure narrative gains traction. For investors willing to look through near-term currency and tariff impacts, Nokia represents a unique combination of transformation momentum, financial strength, and valuation support in the AI connectivity layer.