Nokia's (NOK) Resilience Amid Earnings Miss and Currency Headwinds: A Case for Undervaluation and AI-Driven Growth

In July 2025, Nokia Corporation (NOK) faced a challenging earnings report, with Q2 comparable net sales declining by 1% year-over-year and a downward revision of its full-year operating profit guidance. The 13% drop in Mobile Networks sales and currency headwinds from a weaker USD—projected to reduce operating profit by EUR 230 million—cast a shadow over the company's short-term performance. Yet, beneath these numbers lies a compelling narrative of resilience, strategic foresight, and undervaluation. For investors willing to look beyond the near-term noise, Nokia's positioning in the AI-driven connectivity sector offers a high-conviction opportunity.

Navigating Earnings Misses and Currency Challenges

Nokia's Q2 earnings miss was driven by sector-specific headwinds. The Mobile Networks division, once bolstered by a one-time settlement benefit in 2024, saw a sharp contraction in operating margin to 4.4%, while tariffs and currency revaluations added EUR 50 million in negative impacts. The company's revised full-year operating profit guidance now ranges between EUR 1.6 billion and EUR 2.1 billion, down from EUR 1.9 billion to EUR 2.4 billion. However, these adjustments mask a stronger underlying story:

• Network Infrastructure Growth: This segment, which includes Fixed Networks and Optical Networks, delivered an 8% year-over-year increase in Q2, driven by the successful integration of Infinera. The Infinera acquisition, completed in Q1 2025, has already unlocked EUR 1.4 billion in contracted annual revenue and positioned Nokia as a leader in 800G ZR/ZR+ pluggables, critical for hyperscaler data centers.
• Cloud and Network Services Momentum: A 14% growth in Q2, with operating margin improving from -6.9% to 1.6%, highlights the division's transition from cost-heavy R&D to monetization. Strategic partnerships, such as the AWS Cloud RAN collaboration, underscore Nokia's ability to bridge traditional telecom and cloud-native infrastructure.
• Strong Cash Position: Despite the earnings miss, Nokia maintained a net cash balance of EUR 2.9 billion and generated EUR 0.1 billion in free cash flow for Q2. The company's free cash flow conversion remains robust at 50–80% of operating profit, a metric that outperforms peers like Ericsson and Cisco.

Strategic Positioning in the AI Supercycle

Nokia's long-term growth potential is anchored in its leadership across three critical areas of the AI-driven connectivity ecosystem:

1. 5G and Open RAN: With 336 commercial 5G agreements and a 14% global market share, Nokia is a key player in the transition to Open RAN. Its cognitive platforms, which integrate AI-native infrastructure with edge computing, enable service providers to launch “AI-as-a-Service” offerings. Unlike traditional telecom models, these platforms create a flywheel of innovation and efficiency, particularly in private 5G networks—a segment growing at 30–40% CAGR.

2. Optical Networks: The Infinera acquisition has catapulted Nokia to the forefront of optical networking, a bottleneck for AI workloads. The combined business now boasts a book-to-bill ratio well above 1, with design wins at hyperscalers and communication service providers. As AI demands surge, the ability to move massive datasets across data centers and edge environments will become a critical differentiator.

3. Cloud and AI Infrastructure: Nokia's Cloud RAN partnership with AWS and its 5G Core contracts with AT&T and Telefónica highlight its alignment with hyperscalers. The company's R&D spend of EUR 4.882 billion in 2025—a 17.4% share of net sales—positions it to capitalize on the AI supercycle. Analysts project a 6–14% CAGR through 2030, driven by 5G, private wireless, and AI-native infrastructure.

Undervaluation and Hedge Fund Sentiment

Nokia's current valuation metrics suggest it is trading at a discount to its long-term potential. At a forward P/E of ~12x and a price-to-free cash flow of ~8x, the stock is below its 5-year averages. This undervaluation is partly due to short-term headwinds, but also reflects skepticism about its ability to elevate gross margins to 45–50%. If achieved, a re-rating to 10–15x could unlock significant shareholder value.

Hedge fund activity further reinforces this thesis. While Pzena Investment Management reduced its stake by 14.7%, other funds like Sequoia Financial Advisors and Truist Financial Corp increased holdings by 20% and 139.6%, respectively. Institutional ownership of 5.28% includes major players like Artisan Partners Funds (1.52% of shares). These mixed signals highlight divergent views but suggest that the market is beginning to recognize Nokia's strategic clarity.

Risks and Mitigation

Nokia's path to growth is not without risks. Currency fluctuations and tariffs could erode margins in 2025, while competition from Huawei and Samsung remains intense. However, the company's hybrid business model—balancing hardware, software, and services—provides insulation from market fragmentation. Additionally, its participation in EU-led AI gigafactories and green data centers positions it to capture a $50 billion market segment focused on energy-efficient solutions.

Investment Thesis

Nokia's Q2 earnings miss and guidance revision are symptoms of macroeconomic turbulence, not a fundamental flaw in its business model. The company's strategic acquisitions, R&D investments, and partnerships with hyperscalers have laid the groundwork for long-term growth. With a net cash balance of EUR 2.9 billion and a forward P/E of 12x, the stock offers a compelling entry point for investors who can stomach short-term volatility.

Key Takeaways for Investors:
- Short-Term: Monitor currency and tariff impacts, which are expected to peak in 2025.
- Long-Term: Focus on Infinera synergy realization, AI-driven connectivity adoption, and free cash flow expansion.
- Valuation: The current discount to peers like Cisco and Ericsson suggests upside if gross margins improve.

Nokia is not a “buy and forget” stock, but for those who recognize the transformative power of AI-driven connectivity, it represents a rare blend of undervaluation and strategic positioning. As the AI supercycle accelerates, the company's ability to bridge traditional telecom and cloud infrastructure could redefine its trajectory—and its stock price.