Nokia Q2 Preview: When Does Positioning Become Earnings Power?
Nokia has continued moving toward AI infrastructure, optical and defense. The market has already seen much of it. Q2 is about whether the economics are starting to catch up.
When I wrote about Nokia in May, my conclusion was that the company had become investable again, but that the market was already paying for more than a successful turnaround. The strategy was working, the customers were real and the stock had left value-trap territory behind. What was still missing was evidence that the new positioning offered something more than large volumes in a market growing quickly.
Nokia had demand, longer lead times and supply constraints, but management was also clear that growth in optical was mainly coming from volume rather than higher prices.
Two months later, I still think that is the right starting point. Nokia has received more strategic proof points since then, but I would no longer describe the case as one where the market has failed to notice the change. The stock has already rerated sharply during 2026 and much of the AI and optical story is in expectations. What may still be underestimated is how good the company can become if the order strength starts showing up in margins, cash flow and return on capital.
That is also why the position is small. I want exposure to the change, but I do not want to pay as if the economic model has already been proven.
Q1 Gave Us Real Evidence
Nokia’s first quarter looked better than what many had become used to. Revenue grew 4% on a comparable basis in constant currencies and adjusted for portfolio changes. Comparable gross margin increased to 45.5% and operating margin to 6.2%. Free cash flow came in at €629 million and net cash at €3.8 billion. The most interesting thing was in the customer mix. AI & Cloud sales grew 49% to €350 million and accounted for 8% of group revenue. Nokia also received €1 billion in orders from the same customer group during the quarter. Optical Networks grew 20%, while IP Networks grew 3%.
Eight percent of revenue does not make Nokia a pure AI company. It is enough, however, that AI & Cloud can no longer be treated as a small piece of optionality somewhere near the bottom of the presentation.
Management raised its full-year growth assumption for Network Infrastructure from 6–8% to 12–14%. For Optical Networks and IP Networks combined, the range was raised from 10–12% to 18–20%. At the same time, the full-year outlook for comparable operating profit remained at €2.0–2.5 billion, even though Nokia said it was tracking somewhat above the midpoint.
I do not think an unchanged profit outlook is automatically negative. Nokia is investing more in R&D, manufacturing capacity and supply to capture the demand now in front of it. It would have been a worse sign if management had cut development spending to give us a better margin for one year. But when the growth assumption almost doubles without the profit outlook moving with it, the burden of proof moves further out. Sooner or later, more of the volume needs to stay in the income statement.
That is what I am mainly looking for in Q2.
The Order Book Is Strong. The Path to Revenue Is Longer
The €1 billion Nokia received in AI & Cloud orders during Q1 was probably the quarter’s most important data point. During all of 2025, the corresponding order intake was around €2.4 billion, so one quarter represented a large part of last year’s level. At the J.P. Morgan conference in May, Justin Hotard explained that orders from the second half of 2025 provided much of the visibility behind the 2026 growth assumption, while newer orders increasingly extend into 2027. Nokia also clarified that the order figure only includes firm purchase orders with delivery dates.
Lead times in optical are still around 12–18 months. As customers try to secure capacity further in advance, the order book becomes more predictable, but the connection between an order headline and next quarter’s revenue becomes weaker. I therefore do not expect Q2 to show any perfect conversion. What I want is a better picture of how the orders are split between the second half of 2026 and 2027, whether the supply situation has improved and whether Nokia can deliver more than previously planned.
Hotard was fairly direct about the constraint. The risk is not demand, but supply. With more available capacity, Nokia probably could have filled it.
Since Q1, Nokia has continued putting money behind that part of the strategy. The company has announced a major expansion of advanced test and packaging capacity in Pennsylvania for photonic chips used in AI networks. The investment is part of a broader multiyear U.S. plan for AI-ready connectivity.
I do not read a capacity expansion as a win in itself. What matters is whether the capacity gets filled and whether Nokia can scale without margins being pressured by yields, component costs or inefficient production. When the company takes more control over the supply chain, it also takes on more of the operating risk.
Infinera Needs to Make Nokia Better, Not Just Bigger
Optical Networks still represents a big part of Nokia’s AI momentum. The business generated €821 million in revenue in Q1 and grew 20% on a comparable basis. Growth was strongest in the Americas and was driven mainly by AI & Cloud. Order intake was high and book-to-bill was well above one.
Infinera is a large part of why Nokia looks different now. When the deal was first presented, it looked fairly traditional: more scale, better U.S. presence, greater webscale exposure and then cost synergies. But the integration plan changed when Nokia saw how quickly demand for pluggables and scale-across was growing. The company chose to protect more of the R&D organization and shifted a larger share of the synergies toward product cost and manufacturing. Management has also said the synergies are running nine to twelve months ahead of the original plan.
I think that is the right priority. Deeper cuts could have produced a better short-term margin while weakening the very thing that makes Infinera strategically valuable. Q1 also gave an early economic proof point. Network Infrastructure gross margin increased by 150 basis points to 43.4%, where Nokia highlighted Optical Networks, Infinera synergies, vertical integration and scale. Operating margin, however, declined by 30 basis points to 6.7% because investments and a full quarter of Infinera costs absorbed much of the improvement.
After one quarter, that does not bother me much. Infinera should eventually provide better products, a stronger customer position and more gross profit than the cost base requires.
Competition makes that harder. Ciena remains a strong player in coherent optics and Cisco has Acacia together with a broad systems position. Nokia and Infinera have become a more credible competitor, especially in the U.S., but the market is far from empty. That was also a central point in the May article: Ciena and Cisco can generate real returns through volume in a growing market without that automatically meaning structural pricing power.
The in-house DSP and indium phosphide capacity therefore matter more than the fact that Nokia has simply become larger. Vertical integration can provide better control over performance, power and product cost. But it remains an opportunity for differentiation, not final proof of power.
The News Flow Supports the Direction
The news flow after Q1 has been unusually active. Nokia has continued winning optical projects, including an upgrade of Orange Belgium’s transport network for greater capacity, automation and rising traffic from AI, cloud and 5G. The company has also launched an AI Networking Innovation Lab to work with partners on next-generation data center networking.
I think those announcements are worth mentioning, but they should not be treated as separate theses. They show that Nokia is appearing in more relevant places and that the portfolio is being used in real networks. They say less about what the business does for group margins and returns.
IP Networks may be the most important part to follow here. Sales grew only 3% in Q1, but Nokia won new design wins in routing and switching, including inside the data center. They had not yet entered the order book, and management expected some of them to begin showing up during Q2 and later in the year.
A Nokia case focused mainly on optical can be good enough. It becomes much broader if the company can sell routing and switching to the same AI & Cloud customers. Nokia has its own routing silicon and a software stack that management says is receiving good feedback, but it is still management talk until design wins become orders and orders become revenue.
Q2 does not need to show some enormous switching deal. I mainly want to see that the process is moving forward.
Defense Is Relevant, but Slow
Defense was already part of the May article through Lockheed Martin. The conclusion then was that the partnership showed the trusted Western supplier position was real, but that it did not prove pricing power. That view remains unchanged.
Nokia and Lockheed Martin have presented a modular, mission-critical 5G solution for U.S. and allied defense forces, aligned with open military standards and intended for vehicles and other operational platforms. Nokia has since also moved forward with KNDS around secure connectivity for soldiers and unmanned systems.
The technical connection is fairly clear. Autonomous systems, counter-drone, sensors and distributed command-and-control need stable data transmission in environments where ordinary civilian infrastructure cannot be taken for granted. Nokia already has radio, private wireless, routing and optical. The company does not need to invent the whole product from scratch.
I still do not think defense becomes a game changer in the near term. The more realistic outcome is that it develops into a slow and stable part of the Mission Critical business. Qualification cycles are long, contract values are rarely public and defense procurement is both budget-driven and price-disciplined. Lockheed Martin, KNDS and the other partnerships show that the technology fits. They do not yet show how large or profitable the business will become.
For me, defense is therefore a quality improvement and a long-term data point, not a Q2 catalyst.
The Valuation Makes the Report More Important
In May, I wrote that the easy part of the rerating had already done much of the work. Nokia had moved from roughly €4 to around €11 and was trading at about 26.5 times forward earnings and 14.7 times forward EBITDA. Those were no longer value-trap multiples. The market was paying for the transformation to continue working.
That remains relevant. The question is whether the company can grow into the valuation and then justify the next step.
That requires more than continued order headlines. Network Infrastructure needs better operating leverage. Infinera needs to provide more than consolidated revenue. IP Networks needs to contribute more clearly. Restructuring needs to result in a simpler company rather than just changing names from one year to the next.
Q1 also showed why cash flow should be read with some caution. Free cash flow of €629 million benefited from around €400 million in working capital. Q2 is usually weaker because bonuses are paid, while Nokia is also investing more in optical capacity. I will therefore not judge the report on one cash flow number. I want to see what the money is being used for and whether the investments are being made against an order book that can actually be delivered.
What I Want to See in Q2
Going into the quarter, Nokia expected sales to increase 5–9% sequentially and Q2 comparable operating profit to represent 12–16% of the full-year range. IP Networks was expected to begin accelerating as new AI & Cloud design wins moved toward delivery.
I do not need everything to fall into place at once. What matters is that the development comes in the right order. Order intake needs to stay strong enough that Q1 does not look like one unusually large quarter. Nokia should be able to give a clearer picture of how the order book is split between 2026 and 2027. Network Infrastructure needs to show that gross profit can eventually grow faster than the cost base. Infinera synergies should continue showing up without R&D being cut to produce a cleaner short-term result.
I also want to see IP Networks start moving from design wins to orders. That is where Nokia has the opportunity to broaden itself from a stronger optical player into a more complete supplier inside and between data centers.
Defense does not need to move the numbers yet. There, it is enough that the company continues building real relationships and products without investors pricing in large revenue before contract values and delivery plans exist.
Above all, I want to see volume starting to produce more economic leverage. I do not expect Hotard to suddenly talk about structural pricing power. But if gross margin holds, operating margin begins improving and return on capital moves in the right direction, the distinction between volume and power becomes less important.
Where I Stand
I own Nokia because the company has become better and because optical transport is a layer I want exposure to. The Infinera deal looks more thought through than I first believed, the in-house InP capacity could become valuable and IP Networks provides a possible path deeper into the data center. Defense adds a slow but potentially stable opportunity where the trusted Western supplier position actually matters.
At the same time, Nokia competes with strong players in a market where cost per bit continues falling. Ciena and Cisco are not going away. Hyperscalers are not becoming weak customers. Nokia’s vertical integration can improve the economics, but it needs to be proven in margins and return on capital.
That is why the position is still small for me. Enough has improved that I want to be involved. Not enough has been proven to make it a large position before a report where much is already expected to go right.
Q1 showed that customers are ordering and that the strategy is working. The news flow after the quarter has continued confirming the direction. Q2 does not need to give us a new story. It needs to show that the existing story is starting to reach the income statement.
If orders become shipments, shipments become gross profit and gross profit begins growing faster than costs, then Nokia starts justifying more of the rerating.
Disclosure: I own Nokia as a small position representing roughly 3% of the portfolio. This is my own research and personal opinion, not investment advice. Do your own work before acting on anything here.