Nokia's 2025 Earnings: Navigating Currency and Tariff Challenges While Positioning for AI-Driven Growth

Nokia's Q2 2025 earnings report delivered a mixed bag of results, with near-term headwinds from currency fluctuations and tariffs overshadowing long-term strategic progress. While the company revised its full-year operating profit guidance downward to EUR 1.6–2.1 billion, its investments in AI-driven connectivity, R&D, and operational efficiency suggest a resilient foundation for growth. For investors, the key question is whether these short-term challenges will erode long-term value—or catalyze a more agile and innovative Nokia.

Short-Term Pain: Currency, Tariffs, and Guidance Revisions

Nokia's Q2 operating profit fell 29% year-on-year to EUR 300 million, driven by a EUR 230 million negative impact from currency headwinds and EUR 50–80 million from tariffs. The weaker U.S. dollar (EUR:USD at 1.17 in 2025 vs. 1.04 in 2024) hit the company particularly hard, with non-cash venture fund revaluations alone costing EUR 60 million. Tariffs, meanwhile, are expected to pressure full-year profitability by EUR 50–80 million, further squeezing margins.

Despite these setbacks, Nokia maintained its free cash flow conversion guidance at 50–80% of operating profit, a testament to its disciplined capital management. The company also highlighted a strong net cash position of EUR 2.9 billion as of June 2025, providing a buffer against macroeconomic volatility.

Long-Term Gains: AI-Driven Connectivity and Strategic Realignments

The real story lies in Nokia's long-term positioning. CEO Justin Hotard has staked the company's future on the “AI supercycle,” a shift where connectivity becomes the backbone of AI infrastructure. Nokia's portfolio—spanning mobile and fiber access, data centers, and transport networks—is uniquely suited to this transition.

1. R&D as a Growth Engine

Nokia's Q2 R&D spend of EUR 1.126 billion (up 6% YoY) underscores its commitment to innovation. This investment is critical for maintaining leadership in 5G SA Core deployments, optical networks, and edge computing—segments where demand is surging. By 2027, Nokia expects its AI-focused solutions to contribute meaningfully to revenue, particularly in hyperscaler and defense markets.

2. Strategic Cost Discipline and Operational Leverage

The company's cost-restructuring initiatives, including EUR 400 million in recurring gross savings and EUR 250 million in restructuring charges for 2025, are designed to offset near-term pressures. These measures, combined with a streamlined organizational structure, aim to unlock operating leverage and improve agility in a volatile market.

3. Diversified Revenue Streams

Nokia's segment performance highlights its diversified value proposition:
- Network Infrastructure: Grew 8% YoY, driven by Fixed Networks (17%) and Optical Networks (6%).
- Cloud and Network Services: Rose 14% YoY, fueled by 5G SA Core deployments.
- Nokia Technologies: Delivered 3% growth in IP licensing, a stable cash flow generator.

While the Mobile Networks segment declined 13% due to project timing delays, this reflects a temporary lull rather than a structural weakness.

Risk Mitigation and Capital Markets Clarity

Nokia's revised guidance assumes a EUR:USD rate of 1.17 for the remainder of 2025, a 12% depreciation from January 2025 levels. This underscores the company's exposure to foreign exchange volatility, a risk it plans to hedge through financial instruments and operational adjustments.

The company's November 2025 Capital Markets Day will provide critical clarity on its long-term strategy, including:
- AI-specific roadmap: How Nokia plans to monetize its AI-driven connectivity solutions.
- Infinera synergy realization: The EUR 400 million in cost savings from its 2024 acquisition.
- Capital allocation priorities: Balancing dividends, R&D, and M&A in a high-interest-rate environment.

Investment Implications

For long-term investors, Nokia presents a compelling case of a “value stock with growth potential.” The company's near-term challenges are largely macro-driven, not operational, and its long-term thesis—anchored in AI and 5G—is robust. Key considerations:
1. Currency and tariff risks: These are temporary but significant. A EUR:USD rate of 1.17 is a worst-case assumption; a rebound in the dollar could further pressure margins.
2. Competitive positioning: Nokia trails Ericsson in 5G market share but leads in optical networks and cloud infrastructure. Its partnership-driven culture may give it an edge in AI integration.
3. Valuation: At a forward P/E of ~12x and a price-to-free cash flow of ~8x, Nokia is trading at a discount to its 5-year average, offering margin of safety.

Conclusion: A Company in Transition

Nokia's Q2 results are a cautionary tale about the fragility of global supply chains, but they also reveal a company that is adapting. By doubling down on R&D, streamlining operations, and positioning itself at the intersection of AI and connectivity, Nokia is laying the groundwork for a post-2025 renaissance. For investors willing to stomach short-term volatility, the company's strategic clarity and financial discipline make it a compelling candidate for a diversified portfolio.

Final Note: The November 2025 Capital Markets Day will be a pivotal event. If Nokia can articulate a clear path to monetizing the AI supercycle while mitigating currency/tariff risks, the stock could see a re-rating. Until then, patience is a virtue.