Nokia's Defense and AI Pivot Delivers 54% Profit Jump, Yet Stock Stalls as Valuation Nears 94x Earnings

Nokia beats Q1 estimates with 54% profit jump to €281M, fueled by AI and defense shift. Stock up 95% YTD but P/E near 94 signals caution as profit-taking emerges.

Nokia's first-quarter numbers landed with a thud – in the right direction for the bottom line, but the market's reaction has been more measured. The Finnish network equipment maker posted a 54% surge in comparable operating profit to €281 million, handily beating analyst expectations, while comparable net sales ticked up 4% to €4.50 billion. Earnings per share climbed to €0.05 from €0.03 a year earlier.

The profit engine is being powered by a deliberate shift away from pure-play telecom cycles toward critical infrastructure for defense, cloud and artificial intelligence. Revenue from AI and cloud applications shot up 49%, representing 8% of group sales, and new orders from that segment reached €1 billion during the quarter. Optical Networks also delivered a standout performance, with revenues rising 20% and gross margins expanding 320 basis points to 45.5%. The buoyant trends prompted management to lift the growth guidance for Network Infrastructure to a range of 12% to 14%.

Yet the share price has begun to stall. After rallying roughly 95% year-to-date and 133% over the past twelve months, Nokia's stock slipped 2.73% last week, even as it gained 3.81% on Friday alone to close at €10.87 in Helsinki (equivalent to $12.82 in New York). The monthly gain still stands at an impressive 32.76%, but the weekly fade signals that profit-taking is creeping in.

The reason is plain: valuation. At a price-to-earnings ratio near 93.75, the stock is pricing in a transformation that has yet to fully materialize in earnings breadth. Price-to-sales and price-to-book ratios of roughly 3.25 and 3.08 respectively are well above historical norms for a hardware supplier. The relative strength index of 61 suggests the equity is not cheap, but rather holding at elevated tension levels.

Nokia is leaning hard into two growth vectors to justify that multiple. On the defense front, Nokia Federal Solutions and Lockheed Martin have unveiled a modular 5G communications system designed for US and allied military forces. The solution combines Nokia's commercial 5G gear with Lockheed's 5G.MIL technologies, adhering to the Pentagon's open architecture standards. It taps into Western defense budgets that favor resilient, commercially derived networks – a long-cycle opportunity that could provide revenue visibility for years.

On the commercial side, the partnership with Nvidia, which took a 2.9% stake last autumn, is central to Nokia's AI networking ambitions. The two companies are collaborating on AI-native mobile networks and data-center infrastructure that could eventually account for up to 40% of Nokia's total revenue by 2028. Management now expects the addressable AI and cloud market to expand at a 27% compound annual rate through that year.

To sharpen its focus, Nokia is also pruning its portfolio. The planned sale of its Fixed Wireless Access hardware business to Inseego will see the Finnish company receive an 11% stake in Inseego plus a $10 million cash investment. The transaction is expected to close in the fourth quarter of 2026.

Financially, the company remains on solid footing. Free cash flow reached €0.6 billion in the first quarter, and net liquidity stood at €3.8 billion, providing ample room for further partnerships or bolt-on acquisitions. For the current quarter, Nokia guided for sequential sales growth of 5% to 9%, and it reaffirmed its 2026 target for comparable operating profit between €2.0 billion and €2.5 billion.

The bulls argue that Nokia is no longer a cyclical telecom gear maker but an infrastructure play for AI workloads and secure military networks. The bears counter that a P/E of nearly 94 leaves no room for disappointment, especially if hyperscaler spending slows or if pressure in the mobile networks business crimps margins. The defense narrative helps the story, but it cannot single-handedly replace the need for large, profitable commercial orders in the near term.

Investors will get a fresh look at institutional positioning on May 15, when first-quarter holdings reports are due. After that, all eyes turn to the next quarterly update to see whether the AI and cloud momentum can be sustained with real contracts and stable margins. For now, Nokia's turnaround is delivering on the operating line, but the stock is entering a phase where execution – not just narrative – will determine whether the rally has further to run.