Nvidia’s $1 Billion Bet Turns Nokia Into The New AI Contender

Photo by David Ramos/Getty Images

Getty Images

Nokia stock (NYSE: NOK) is back in the spotlight. The Finnish telecom giant’s shares surged over 20% this week after Nvidia stock (NASDAQ: NVDA) revealed a $1 billion investment for approximately a 2.9% stake, forming a new alliance to develop AI-driven networking and 6G infrastructure.

For investors, this is not merely a fleeting headline. It’s an opportunity to reevaluate a company often viewed as a legacy player. With a market capitalization of $42 billion, Nokia delivers mobile, fixed, and cloud network solutions from 2G to 5G, and now, it’s seeking to position itself as a link between telecom and AI infrastructure. Let’s analyze how it compares.

Nevertheless, if you seek upward potential with reduced volatility compared to holding a single stock, consider the High Quality Portfolio. It has substantially outshined its benchmark—a combination of the S&P 500, Russell, and S&P MidCap indexes—and has produced returns exceeding 105% since its inception. What explains this? Collectively, HQ Portfolio stocks have provided superior returns with lower risk than the benchmark index, minimizing significant fluctuations, as demonstrated in HQ Portfolio performance metrics. Additionally, take a look at – After A Hot Run For Gold, Will Stocks Take The Lead Again?

Valuation Appears High

At first glance, Nokia does not seem to be a bargain. The stock trades at a price-to-earnings ratio of 41x, compared to the S&P 500’s 24. Its price-to-sales and price-to-free cash flow ratios — at 2.2 and 33.3, respectively — also surpass market averages. This indicates that optimism has likely set in. The Nvidia partnership may warrant a premium, but the market is evidently betting on strong execution ahead. For investors, this implies that the narrative now rests on whether Nokia can provide sustained growth in a sector characterized by fierce competition and slim margins.

Growth Has Been Irregular

Nokia’s growth record has been inconsistent. Over the last three years, revenue actually declined at an average rate of nearly 6% per year, significantly trailing the S&P 500’s positive trend.

The positive news? Indicators of improvement are evident. In the last twelve months, Nokia’s revenue increased by almost 6%, reaching $20 billion, with its most recent quarter showing an 11.6% year-over-year increase. This upturn, bolstered by AI-related momentum and increased network demand, is one of the reasons the stock has attracted new investor interest.

However, the more significant challenge will be sustainability. Can Nokia transform temporary order surges into long-term, profitable growth? That remains an unanswered question.

Profitability Remains Weak

Despite increasing sales, Nokia’s profitability lags significantly behind competitors. Operating margins hover around 3.7%, compared to the S&P 500’s 18.7%. Its net income margin, approximately 4.7%, presents a similar narrative — respectable for a hardware-heavy industry, but far from robust. Cash flow generation is somewhat stronger, with a 9.6% operating cash flow margin, or about $1.9 billion over the previous year. Still, Nokia must significantly increase margins if it aims to be recognized as a genuine AI-infrastructure contender rather than just a cyclical telecom supplier.

Financial Stability Is a Key Strength

Where Nokia excels is in its balance sheet strength. Debt stands at only $4.1 billion with a modest debt-to-equity ratio close to 10%. The company also has $6.1 billion in cash, approximately 17% of total assets, which is considerably higher than the average S&P 500 peer.

In a capital-intensive sector, that financial cushion is crucial. It provides Nokia the capacity to invest in AI networking, support research and development, and manage downturns without incurring major dilution or distress.

Downturn Resilience Has Been Poor

Nokia’s stock history illustrates a narrative of vulnerability in the face of market shocks. It plummeted 54% during the 2022 inflation-driven downturn, significantly steeper than the S&P 500’s 25% drop, and it has not yet fully recovered to pre-crisis levels. The crash of 2008 was even harsher, with the stock dropping nearly 79% and never regaining those heights.

On a positive note, Nokia rebounded swiftly from the 2020 pandemic sell-off, regaining losses in just 81 days, outpacing the broader market. However, overall, the company’s crisis resilience has fallen short, serving as a reminder that investor sentiment can shift dramatically when fundamentals weaken.

Bottom Line: A Cautious Reboot

Nokia’s new collaboration with Nvidia could signify a pivotal moment, allowing the company to reposition itself as an AI-era infrastructure leader instead of a struggling telecom supplier. Nevertheless, the figures still narrate a mixed story: high valuation, uneven growth, thin margins, yet a robust balance sheet.

For the time being, investors ought to approach this as a high-risk, high-reward turnaround. Nvidia’s billion-dollar endorsement provides Nokia with new credibility — but only consistent execution and margin enhancement will convert that promise into lasting value.

You may wish to explore the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap benchmark (a mix of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to provide solid returns for investors. What accounts for this? The quarterly rebalanced mix of large-, mid-, and small-cap RV Portfolio stocks presents a flexible strategy to exploit favorable market conditions while mitigating losses during market downturns, as detailed in RV Portfolio performance metrics.