Helsinki-listed Nokia Oyj (HEL:NOKIA) saw its shares climb 3.8% to €8.23 on Friday, outperforming the broader OMX Helsinki 25 index, which advanced 0.9%. The stock has now gained 8.9% since Wednesday's close, as investors digested a raft of company-specific news including a major AI order haul and a credit outlook upgrade from S&P Global Ratings.
S&P Upgrades Outlook, Retains Rating
S&P Global Ratings shifted its outlook on Nokia to positive from stable, while affirming its BBB- long-term and A-3 short-term credit ratings. The agency indicated that an upgrade by one notch is possible within the next 24 months, contingent on Nokia's ability to sustain strong order conversion and cash flow generation. However, S&P projects a decline in Nokia's margin and cash generation for 2026, and requires free operating cash flow to exceed €1.3 billion to trigger an upgrade.
AI and Cloud Orders Soar
Nokia reported a surge in AI and cloud orders, totaling €2.8 billion in the second quarter, against revenue from these clients of €446 million. This represents an order-to-revenue ratio of 6.3 times, indicating robust demand. Management anticipates that roughly half of these orders will convert to revenue within the next twelve months, implying approximately €1.4 billion in future sales—about 78% of annualized AI and cloud revenue from the second quarter.
CEO Justin Hotard commented, "Demand remains strong, while supply continues to be the main industry constraint." The company noted that supply shortages are prompting customers to place orders further in advance, a trend that could support revenue visibility but also introduces execution risks.
Earnings Beat, But Guidance Raises Questions
Nokia's second-quarter earnings provided some encouragement. Comparable operating profit rose 18% year-over-year to €434 million, beating the analyst consensus of €382 million by 13.6%. Comparable net sales grew 8% to €4.815 billion, with Network Infrastructure sales up 12% to €2.037 billion. The comparable operating margin expanded by 70 basis points to 9.0%.
However, the full-year guidance requires careful scrutiny. Nokia's comparable operating profit forecast stands at €2.1 billion to €2.6 billion, but the €100 million increase is attributed to a technical reporting adjustment rather than an improvement in underlying operations. The company expects third-quarter sales to rise 3% to 7% quarter-on-quarter, but comparable operating profit is expected to remain roughly flat, with a significant profit boost deferred to the fourth quarter due to software timing shifts.
Cash Flow and Cost Pressures
Cash requirements remain elevated. Nokia forecasts capital expenditures of €800 million to €900 million, and cash outflows tied to restructuring are expected to total €700 million to €800 million. These outflows will pressure free cash flow, which S&P projects at €1.1 billion for 2026—below the €1.3 billion threshold for a potential upgrade.
Peer Ericsson (STO:ERIC-B) highlights the risks of component cost inflation. Ericsson reported a 6% decline in second-quarter sales, and free cash flow before acquisitions fell to SEK 0.4 billion from SEK 2.6 billion. The company anticipates continued margin pressure in its networks business in the third quarter, underscoring the challenges facing the telecom equipment sector.
Investment Thesis: Order Conversion is Key
Nokia's order intake is impressive, but the market is focused on conversion. The company faces the challenge of translating roughly €1.4 billion in anticipated order conversions into sustained cash flow. S&P's forecast of €1.1 billion sets a tough benchmark, and any delay or margin erosion could undermine the investment thesis.
Key risks identified by Nokia include semiconductor availability, customer spending, tariffs, and competition. Investors will be watching closely to see if the company can meet its conversion targets and generate the cash flow needed to support an upgrade and justify the recent share price rally.
