Nokia Oyj

Nokia reported good second-quarter results as demand for artificial intelligence and cloud infrastructure led to 9% revenue and 18% operating profit growth. Despite this, shares dropped 5% following commentary about lumpy demand and continuing supply constraints.

Why it matters: Nokia's core growth story remains intact and is being realized through increased revenue and profits. While concerns over supply are valid, we believe them more transitory and less of a concern than broader competition in optical and mobile networking from the likes of Ciena and Ericsson. Sales to AI and cloud customers doubled to EUR 446 million, and the firm signed EUR 2.8 billion of new orders during the quarter. This order intake is nearly triple the first-quarter value, but management noted that demand would be lumpier. Mobile infrastructure sales, which still comprise half of revenue and two-thirds of positive operating profits, grew 6%, the fastest pace in nearly two years. We expect this growth to slow given the cyclicality of telecom provider spending and the threat of open-source hardware.

The bottom line: We maintain our EUR 7.30 fair value for no-moat Nokia, driven by growing demand for optical networking. We anticipate financial results will continue trending upward despite likely lumpy demand and supply constraints. Of the four businesses Nokia recognizes as noncore, fixed wireless access equipment and enterprise campus edge have been marked for sale. We believe a sole focus on optical and mobile networking is prudent given the increasing research and development needs of both businesses. We like Nokia's business but believe it is still overvalued despite the 40% decline since its recent peak.

Between the lines: Given supply constraints in digital signal processors and memory, the lead time for Nokia's flagship optical equipment continues to grow, which may threaten the firm's ability to meet its stated 12-month timeline.

Our fair value estimate of $8.50 per share reflects an exchange rate of USD 1.17/EUR, implying price-to-earnings and enterprise value/EBITDA multiples of 38 and 13, respectively, based on our 2026 estimates.

We forecast revenue to average 4%-5% between 2026 and 2030, with slower growth beyond 2030, as demand from the data center buildout becomes more lumpy. In mobile networks, Nokia remains a leader in global radio access network, or RAN, equipment, but conservative capital spending by major carriers across the globe will limit growth, in our view. While still in early development, products compliant with 6G standards are likely to be commercially available beginning in 2030, giving the mobile infrastructure segment some additional demand beyond 2030. Technological challenges, such as ORAN, are likely to cap Nokia's potential growth opportunities from 6G relative to 5G.

We expect the networking infrastructure segment to grow nicely and roughly match the mobile infrastructure segment in revenue by 2029. Still, mobile networks should be more profitable, given the presence of the software business.

We believe firm profitability will improve as an optical networking mix shift and cost savings drive incremental margin expansion. Commoditization of networking equipment is likely to reduce Nokia's pricing power, but a shift towards software and service offerings is likely to more than offset any margin compression in equipment sales.

We believe there is some room to reduce R&D as a percentage of sales, given significant increases in optical networking revenue, but we still expect R&D expenses to grow in absolute terms. Overall, we expect the operating margin to expand from an artificially low 3.7% in 2025 to 14.7% in 2035.

We assign Nokia a 7.8% cost of capital, assuming an 8.5% cost of equity, a 4.2% cost of debt, and a favorable inflationary adjustment of 0.2%.

We assign Nokia a no-moat rating. While Nokia possesses some characteristics of an economic moat, the structural challenges of the telecommunications equipment industry prevent these advantages from translating into long-term, persistent economic profits.

The strongest claim to a competitive advantage would be derived from intangible assets. Nokia spends in excess of EUR 4 billion on research and development annually, generating intellectual property in the form of patents. Nokia currently holds over 268,000 patents across 20,000 patent families, with over 8,000 deemed essential to 5G wireless standards. Despite investing over 20% of sales in R&D, Nokia is unlikely to derive a competitive advantage from its intellectual property. Wireless standards constantly change, and dominance in one standard or generation is little guarantee of future success.

Historically, the segment with the best case for a moat was Nokia Technologies, which has now been combined with Mobile Infrastructure. Nokia Technologies, which licenses patents to smartphone vendors, automotive companies, and consumer electronics firms, has generated between EUR 1.1 billion and EUR 1.5 billion in revenue in recent years, with very high operating margins (71% in 2025). However, this patent licensing business is only a small fraction of Nokia's total revenue. Also, we believe that the majority of the patents Nokia licenses result from R&D in the networking and mobile infrastructure segments, where maintaining intangible assets requires substantial, continuous reinvestment to avoid obsolescence.

In addition to intellectual property, Nokia and Ericsson benefit from favorable regulations. Western-aligned countries have banned the purchase and deployment of equipment from Chinese networking competitors, specifically Huawei and ZTE. This leaves the North American and European markets primarily serviced by Nokia, Ericsson, and Samsung in radio-access networks, or RAN, and additionally by Cisco and Juniper Networks in physical networks and routing.

While Nokia and Ericsson both benefit from this favorable regulation, Western markets remain highly competitive, with network vendors regularly undercutting each other on price. Wireless carriers are cost-conscious, and we don’t believe wireless equipment vendors produce meaningfully differentiated equipment, which encourages carriers to pursue the best coverage at the lowest cost. Additionally, in most countries, wireless carriers are oligopsonies, with their bargaining power exceeding that of the networking equipment providers. With a highly concentrated telecom customer base relentlessly pushing for greater interoperability among equipment and software manufacturers, profitability in wireless networking markets has been weak.

Nokia’s optical networking offering, bolstered by the acquisition of Infinera, holds the highest probability of generating a moat for the firm. Increasing data center demand has led to a customer mix that extends beyond telecom providers to include hyperscalers and neo-cloud providers. This results in better margins than the mobile infrastructure business. Chinese competitors are also banned from supplying optical equipment in Western markets, resulting in a duopoly between Ciena and Nokia in many of those markets.

We see two hangups that prevent the optical networking business from generating a companywide moat. Nokia and Infinera have consistently trailed Ciena when releasing new generations of capacity standards, often by a year or more. This results in Nokia having difficulty displacing Ciena among the most profitable customers who have deeply embedded Ciena products in their network flows. Additionally, Cisco has made slow but concerted efforts to break into the optical networking space and will likely take some share in a few capacity generations. Secondly, the research and development expenses required for the firm, including mobile infrastructure, are so significant that they suppress the firm-wide returns on invested capital.

The other potential moat source for Nokia is switching costs. In industrial technology and telecom equipment, switching costs are naturally high due to the risk of downtime, the high cost of failure, and the complex retraining and integration required to swap core network infrastructure and software. Historically, if a customer like AT&T wanted to switch from Nokia to Ericsson equipment and software, it would have to remove all Nokia equipment and replace it (or a major portion of it) with Ericsson equipment and software, incurring retraining costs for the software implementation and potentially resulting in network outages.

While switching costs exist, they are clearly not insurmountable. Major communication service providers are willing to endure the friction of switching vendors if the financial or technological value proposition is strong enough. For example, Nokia lost out on new contracts when Verizon elected to equip a portion of its 5G network with Samsung in 2020. AT&T ousted Nokia in favor of Ericsson in 2023. Furthermore, the industry is actively shifting toward the open radio access network, or ORAN, architecture and cloud-native software. ORAN is specifically designed to disaggregate hardware and software, effectively lowering switching costs and allowing operators to mix and match vendors.

Nokia’s acquisition of Infinera makes it a strong player in data center interconnect networking, which is experiencing extraordinary growth.

Wireless technology built for wireless carriers is now being sold to private enterprises, widening Nokia’s customer mix and increasing returns on R&D investment.

Mobile network R&D should produce a steady stream of new patents, which will be monetized through licensing to third parties.

Nokia’s customer base is concentrated among large, capex-wary telecom providers, who hold dominant negotiating leverage.

Technologies such as open-RAN are commoditizing mobile hardware and minimizing any pricing power that vendors may have.

Growth in optical networking is predicated on the success of AI and the data center buildout, which is uncertain.