Lenovo: Revisiting AI Growth Potential And Valuations (Rating Upgrade)

seekingalpha05-24

The outlook for Lenovo's key businesses is favorable, considering the positive read-throughs from the company's above-expectations Q4 results and relevant third-party industry research.Lenovo's stock ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nLenovo: Revisiting AI Growth Potential And Valuations (Rating Upgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-24 00:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4695285-lenovo-revisiting-ai-growth-potential-and-valuations-rating-upgrade><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The outlook for Lenovo's key businesses is favorable, considering the positive read-throughs from the company's above-expectations Q4 results and relevant third-party industry research.Lenovo's stock ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695285-lenovo-revisiting-ai-growth-potential-and-valuations-rating-upgrade\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4588","symbol_name":"碎股","start_time":0,"source_url":"https://seekingalpha.com/article/4695285-lenovo-revisiting-ai-growth-potential-and-valuations-rating-upgrade","article_id":"2437762038","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/464883650/image_464883650.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2437762038","pubTimestamp":1716480050,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The outlook for Lenovo's key businesses is favorable, considering the positive read-throughs from the company's above-expectations Q4 results and relevant third-party industry research.Lenovo's stock ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4588":"碎股","BK4533":"AQR资本管理(全球第二大对冲基金)","DELL":"戴尔","BK4515":"5G概念","HPQ":"惠普","BK4170":"电脑硬件、储存设备及电脑周边","ASUUY":"ASUSTeK Computer Inc.","BK4535":"淡马锡持仓","LNVGF":"Lenovo Group Ltd.","BK4585":"ETF&股票定投概念","LNVGY":"联想集团ADR"},"translate_title":"联想：重新审视人工智能增长潜力和估值（评级上调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ASUUY":1,"DELL":1,"HPQ":1,"LNVGF":1,"LNVGY":1},"content_text":"The outlook for Lenovo's key businesses is favorable, considering the positive read-throughs from the company's above-expectations Q4 results and relevant third-party industry research.Lenovo's stock is trading below fair valuation based on a comparison of its P/E metric with peers and its bottom line growth forecasts.I have assessed LNVGY to be an undervalued AI play, which has prompted me to raise my rating for the name to a Buy.   olegganko/iStock Editorial via Getty ImagesElevator Pitch I rate Lenovo Group Limited (OTCPK:LNVGY) (OTCPK:LNVGF) [992:HK] as a Buy. My earlier article published on January 15, 2024 touched on AI PCs and Lenovo's valuations. In the current update, I revisit how Lenovo will benefit from AI-related tailwinds and take another look at the stock's key valuation metrics following the company's recent results' announcement. Taking into account LNVGY's latest financial performance and relevant third party research, there are good reasons to be optimistic about the medium-to-long term growth potential of AI PCs and AI servers. Lenovo is undervalued relative to peers and its future earnings growth expectations, even though it is a beneficiary of AI-related tailwinds. Therefore, my decision is to revise my rating for Lenovo from a Hold to a Buy. Readers should be aware that the company's shares can be bought or sold in the Hong Kong equity market and the Over-The-Counter or OTC market. The average daily trading values for Lenovo's shares traded on the OTC market and the Hong Kong Stock Exchange were $1.5 million and $80 million, respectively for the last three months. US stockbrokers like Interactive Brokers allow their clients to trade in Lenovo's comparatively more liquid Hong Kong-listed shares. Q4 FY 2024 Financial Performance Was Better Than Expected Lenovo released the company's Q4 FY 2024 (YE March 31, 2024) financial results' announcement on May 23 before the market opened. LNVGY's latest quarterly performance exceeded the sell-side analysts' expectations. Revenue for Lenovo expanded by +9% YoY from $12,635 million for the final quarter of fiscal 2023 to $13,833 million in the most recent quarter. The company's Q4 FY 2024 top line beat the market's consensus sales estimate of $13,201 million (source: S&P Capital IQ) by +5%. The company's actual Q4 FY 2024 normalized net income attributable to shareholders was $218 million. This was +33% above the sell-side's consensus bottom line forecast of $164 million, based on data sourced from S&P Capital IQ. Also, Lenovo's -23% YoY contraction in normalized net profit for Q4 FY 2024 represented an improvement as compared to the -49% YoY drop in net income for 9M FY 2024. LNVGY's ISG (Infrastructure Solutions Group), SSG (Solutions & Services Group) and IDG (Intelligent Devices Group) segments saw their respective revenues grow by +15%, +10%, and +7%, respectively on YoY terms in Q4 FY 2024. In its earnings press release, Lenovo noted that its latest fourth quarter results were an illustration of how the company \"captured the tremendous growth opportunities presented by AI.\" LNVGY indicated in its Q4 results announcement that the ISG segment's \"AI products (e.g. AI servers) began to contribute positively to its growth trajectory\" in 2H FY 2024 thanks to the \"booming demand for AI GPU (Graphics Processing Unit).\" The company's IDG segment \"shipped its first wave of AI PCs\" in the recent quarter according to its earnings press release commentary. In its Q4 FY 2024 results presentation slides, Lenovo shared that its SSG segment had recently rolled out \"AI services including AI Discover and AI Fast Start\" to \"enable customers’ AI adoption.\" A Brief Description Of Lenovo's AI Discover And AI Fast Start Services Lenovo's Corporate WebsiteAs such, it is reasonable to say that the company's three business segments benefited from AI tailwinds in one way or another for the most recent quarter. This helped Lenovo to deliver a +5% top line beat in Q4 FY 2024. Lenovo's latest quarterly earnings beat was driven by above-expectations revenue growth and gross margin expansion. The company's gross profit margin improved by +1.1 percentage points QoQ and +0.6 percentage points YoY to 17.6% in the final quarter of the prior fiscal year. This represented the highest quarterly gross margin that Lenovo had achieved in its history. LNVGY attributed the company's profitability improvement to both \"operational excellence\" and \"AI innovations\" in its Q4 results presentation. AI-Related Growth Opportunities Third-party research suggests that there are significant growth opportunities emerging from the rise of AI in the coming years, which will benefit Lenovo. In my previous mid-January 2024 write-up, I drew attention to \"Lenovo's expectations of AI PCs' penetration rate potentially increasing\" to \"50%-60%\" in the years ahead. Morgan Stanley (MS) published a research report (not publicly available) titled \"AI PCs To Usher In The Next Leg Of PC Market Growth\" on May 21, 2024. In this late-May report, MS outlined its projections that the worldwide AI PC penetration rate will rise from 2% in calendar year 2024 to 65% by calendar year 2028. Lenovo indicated in its Q4 FY 2024 earnings release that \"more (of its AI PC offerings) will ship in the coming quarters.\" This means that LNVGY is well prepared to leverage on the growth in demand for AI PCs. Separately, an earlier April 17, 2024 report (not publicly available) issued by Singapore bank DBS Group titled \"AI Server Business Is A New Driver\" highlighted the positive growth outlook for AI servers. In this mid-April research report, DBS Group forecasted that \"AI servers' global market share\" could grow from 11% last year to 20% for calendar year 2025 as a result of \"GPU shortage easing.\" This is consistent with Lenovo's observations in its latest Q4 results announcement that \"the supply gap (for the AI GPU market) showed signs of narrowing.\" In a nutshell, LNVGY boasts strong growth prospects for the mid-to-long term, considering the favorable outlook for AI servers (the ISG segment) and AI PCs (the IDG segment). The Stock's Valuations I have previously determined that Lenovo's shares were reasonably valued in my January 15, 2024 article. My updated valuation analysis presented in this section indicates that Lenovo's stock has the potential to trade higher. The current consensus FY 2025-2028 earnings CAGR for Lenovo is an impressive +18% as per S&P Capital IQ data, which would have likely taken into account LNVGY's AI-related growth opportunities. In contrast, the market is now valuing Lenovo at 13 times consensus FY 2025 normalized P/E. This translates into an attractive Price-to-Earnings Growth or PEG metric of 0.72 times for the stock. This is much lower than the 1x PEG that is a rule of thumb for fair valuation. Also, Lenovo currently trades at a discount to the peer average based on the P/E valuation metric. The mean consensus next twelve months' normalized P/E for the peer group, comprised of Acer (OTC:ACEYY) [2353:TT], Dell (DELL), ASUSTek (OTCPK:ASUUY) [2357:TT], and HP (HPQ) is a relatively higher 18 times as per S&P Capital IQ data versus Lenovo's current P/E of 13 times. In summary, Lenovo's shares are attractively valued, which supports the case for a Buy rating. Risk Factors The key risks for LNVGY relate to AI PCs and AI servers. Assuming that AI PCs fail to live up to users' expectations and turn out to be a fad, Lenovo's IDG segment could record lower-than-expected PC sales in the future. On the other hand, LNVGY might be unable to fully capitalize on AI server demand growth, if there is an under-supply of AI GPUs. Final Thoughts I have turned positive on Lenovo. The stock's valuations are undemanding, and the company has a favorable growth outlook considering AI-related tailwinds.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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