Nokia (NOK) saw its share price decline 3.6% on Friday, closing at $10.21, as investors weighed the company's aggressive push into AI and cloud infrastructure against a significant cash outflow. The Helsinki-based telecom equipment maker reported a negative free cash flow of €732 million for the second quarter, a stark contrast to its otherwise improving operational metrics.
AI and Cloud Revenue Surges, but Costs Mount
Despite the cash burn, Nokia's AI and cloud segment delivered impressive growth, with sales jumping 105% on a constant currency basis to €446 million. The company also reported an order intake of approximately €2.8 billion for the quarter, signaling robust demand for its AI-driven networking solutions. However, the accelerated restructuring program, which incurred €390 million in charges, dragged the reported operating margin to -1.0%, even as the comparable operating margin improved to 9.0%.
Total net sales rose 8% year-over-year to €4.82 billion, reflecting a broad-based recovery across its business units. The comparable operating profit reached €434 million, but after accounting for restructuring expenses, the company posted an operating loss of €50 million.
Working Capital Pressure
The most concerning aspect for investors was the €1.15 billion absorbed by working capital during the quarter. This significant outflow reduced Nokia's net cash and interest-bearing investments to €2.78 billion. The company's cash conversion cycle has become a key focus, as management works to balance growth investments with shareholder returns.
Nokia's management maintained its full-year guidance, projecting comparable operating profit between €2.1 billion and €2.6 billion, with expectations of slightly exceeding the midpoint. However, the market remains skeptical, as the stock is still down 41.5% from its June peak of $17.45, despite a strong rally over the past year.
Valuation Concerns
At current levels, Nokia's trailing price-to-earnings ratio stands at nearly 72 times, significantly higher than the peer average of 57 times and well above the communications sector's average of about 34 times. This premium valuation reflects the market's high expectations for AI-related growth, but it also leaves little room for error.
Analysts caution that AI order flows may be volatile, and the conversion of these orders into revenue could take more than twelve months. The company's ability to accelerate cash recovery and reduce restructuring expenses will be crucial for its re-rating. Even if AI revenue continues to double, the benefits could be muted if working capital and restructuring costs continue to absorb operating profits.
Market Reaction
Trading volume on Friday reached 50.6 million shares, below the 50-day average of 86.9 million, indicating that the sell-off was not driven by panic but rather a cautious reassessment. The decline snapped a three-session winning streak, reflecting investor unease about the sustainability of the company's cash flow.
Nokia's strategic pivot to AI and cloud is a high-stakes bet. While the growth metrics are encouraging, the financial strain is evident. The company must demonstrate that its investments will translate into improved cash generation in the coming quarters to justify its premium valuation.