Pzena Sold Nokia at the Peak. The Valuation Gap Hasn't Narrowed.

Pzena's Global Focused Value fund continued to sell Nokia on strength during the second quarter of 2026, trimming the position as the stock reached a 52-week high of $17.45. The competitor headline frames this as a modest —1.53% portfolio impact. But the real story isn't how much Pzena sold — it's why a value manager would exit a stock at its absolute peak, and whether the subsequent 46% collapse from that high has created a new entry point or simply repriced an overvalued business to something less absurd.

The answer depends on what you believe Nokia is. The market rallied it as an AI infrastructure compounder. The fundamentals say something closer to a turnaround story with a clean balance sheet and middling returns on capital.

What Drove the Rally

Nokia's stock surged from a 52-week low of $4.08 to over $17 — a 128% year-to-date gain at its peak — on an AI infrastructure narrative that caught the market's attention. The catalysts were real: AI and cloud-related revenue jumped 49% year-over-year in fiscal Q1 2026, and the company reported €2.8 billion in AI order intake in Q2, up from €250 million in the prior-year period. Management raised full-year 2026 guidance for Network Infrastructure to 12–14% growth (from 6–8%) and Optical and IP Networks to 18–20% (from approximately 10%). Partnerships with NVIDIA on AI-driven networking and the acquisition of an NXP chip fabrication campus in Arizona added to the story.

But revenue growth alone didn't move the stock fourfold. What moved Nokia was a multiple expansion so severe it detached the price from any reasonable earnings framework. The rally was a PE expansion play, not a cash-flow reacceleration story.

The Valuation at the Peak

At the June 2026 high, Nokia's trailing P/E had expanded well above 100x — a multiple that implies not just exceptional growth but exceptional and durable margins. The actual operating profile told a different story.

Comparable operating margin in Q2 stood at 9.0%, up 70 basis points year-over-year. That's improvement, but it's not the margin profile of a company justifying triple-digit valuation multiples. Reported operating margin was actually negative — at minus 1.0% — weighed down by €800 million in accelerated restructuring charges. The company spent more on restructuring in 2026 than its entire trailing twelve-month operating cash flow of $1.32 billion.

A discounted cash flow analysis published in mid-June estimated Nokia's intrinsic value at $12.54 per share when the stock was already at $14.80 — suggesting the market was pricing in roughly 18% upside beyond what free cash flow could support. At the $17.45 peak, the disconnect was wider still.

The Pullback

The stock has since collapsed to $9.36, down 24.8% over the last 20 trading days and roughly 46% from its June high. The selloff was driven by a broad technology sector rout, profit-taking after a massive year-to-date rally, and recognition that the PE expansion had outpaced fundamentals. Nokia reported Q2 earnings that beat on a comparable basis — €0.07 per share versus expectations of €0.06 — and slightly missed on top-line revenue by a narrow margin. The stock was still falling even on a beat-and-raise.

This is what happens when valuation is the primary engine of a rally. Once sentiment turns, the fundamentals that seemed impressive at a 40x multiple look far less convincing at 100x. The market corrected.

The Current Picture

At $9.36, Nokia still trades at 65 times trailing twelve-month earnings, with a forward PE of 736x. That forward multiple is absurd on its face — it reflects the market's expectation that earnings will contract dramatically before the AI-driven growth story translates into bottom-line profit. The EV/EBITDA multiple of 24.9x is also steep for a company generating 9% operating margins and a return on invested capital of just 1.8%.

The balance sheet is the one bright spot. Nokia carries $18.25 billion in total debt against $4.96 billion in cash, but the company's working capital structure creates a net debt position of negative $2.78 billion — meaning Nokia is technically net cash positive. Debt-to-equity sits at just 11.3%, and the current ratio of 150.5% signals no liquidity stress. For a value investor evaluating downside risk, the balance sheet provides a floor.

But a clean balance sheet doesn't turn a low-ROIC business into a compounder. Nokia's return on invested capital of 1.8% is barely above the cost of capital for a company of its risk profile. ROE of 3.5% on €24.3 billion of equity tells the same story: the company generates revenue growth but converts very little of it into owner earnings. The comparable gross margin of 44.1% and operating margin of 9.0% leave enormous room for improvement, but the €800 million restructuring program suggests management itself recognizes that the current cost structure is not sustainable at the desired margin level.

The dividend adds no income portfolio utility. The forward yield of 2.0% is barely above a high-quality Treasury, and the payout ratio of 88% leaves almost no room for the company to reinvest and grow the payout simultaneously.

Where Pzena Was Right — and What Comes Next

Pzena's move was textbook value discipline: sell into strength when a stock's multiple expansion has outrun the underlying business's ability to earn on its capital. Nokia is not a commodity business with inherently cyclical margins — it's an infrastructure company with real secular tailwinds from AI data center buildout and 5G deployment. But it's not yet an AI compounder either. The 49% revenue growth in AI and cloud is impressive on a small base, and the €2.8 billion order book provides visibility. Management expects roughly 50% of those orders to convert to revenue over the next twelve months, which would add approximately €1.4 billion of incremental sales.

The question is margin expansion, not revenue growth. If Nokia can lift its comparable operating margin from 9% toward 12–15% as restructuring completes and AI revenue scales, the earnings multiple compresses from 736x forward to something in the 50–60x range — still rich but defensible. If margins stall at current levels, the multiple stays absurd and the stock stays expensive.

Investment Thesis

Nokia is neither the cigar butt it was at $4 nor the AI compounder the market priced it as at $17. It's a company in the middle of an expensive restructuring, growing revenue at a decent clip but converting very little of it into returns on equity. The balance sheet provides downside protection. The AI narrative provides a path to margin expansion. But the path hasn't materialized yet, and the multiple still prices it in.

At 65x trailing earnings and 1.8% ROIC, Nokia remains overvalued. The pullback from the peak has reduced the absurdity but hasn't closed the valuation gap to a point where the risk-reward favors entry. This is not a retirement-quality holding at current levels — the dividend yield is too thin, the payout ratio too high, and the earnings power too uncertain to justify the multiple.

The thesis to watch: comparable operating margin expansion in H2 2026. Management has guided for comparable operating profit of €2.1–2.6 billion for the full year and stated the company is on track to deliver "somewhat above the midpoint." If that holds and margins expand toward 12%, the stock starts earning its multiple. If restructuring costs prove stickier than expected or AI order conversion disappoints, the multiple compression continues.

Rating: Hold. Not a buy until the operating margin trajectory is confirmed and the trailing PE compresses below 40x. The market corrected from the peak, but the correction hasn't been sufficient to create a margin of safety for a new position.