AI reshaped the memory market pattern, and Lenovo changed from a victim of cyclical pressure to a beneficiary of pricing power.Morgan StanleySignificant upward revisionLenovo GroupRating and Price Target.
According to the news of the wind trading desk, on July 9th, Morgan Stanley's Howard Kao team upgraded Lenovo's neutral rating to "overweight", and the target price was significantly raised from HK$ 14.20 to HK$ 30.00, which is about 34% upside compared with the closing price of HK$ 22.32 on July 8th.
According to the report,AI-driven demand has fundamentally changed the supply and demand landscape of the memory market, allowing Lenovo to pass on higher component costs to customers while maintaining profit margins。 The bank expects that,This trend will continue into at least the second half of 2026.
Morgan Stanley's downgrade is significant at the valuation level. The bank's EPS forecast for FY2027 through FY2029 is approximately 20% higher than consensus estimates, with the main difference coming from stronger margin assumptions.
Lenovo's share price has risen 82% in the past two months, while the Hang Seng Index has fallen 9% in the same period.
Chip price increase rewrites OEM pricing logic
This round of memory price increase cycle is essentially different from the past.
Morgan Stanley pointed out,In the past memory upward cycle, customers usually delayed purchasing in anticipation of price decline, which directly limited the ability of OEMs to change prices and eventually led to pressure on profit margins.
However, AI-driven demand is simultaneously tightening the supply of HBM, DRAM and enterprise-grade SSD, and it will take years rather than quarters for new capacity to complete construction, certification and mass production climb.
Morgan Stanley therefore believes that the current environment should be viewed as a structural shift in the supply and demand relationship of the industry, rather than a fluctuation in the semiconductor cycle in the traditional sense.
This shift has profoundly changed customer behavior. At the 2026 ISC High Performance Computing Conference, Lenovo management said memory prices "may never return" to the levels they were at the beginning of 2025. Management reiterated that judgment at an investor day in New York on June 25.
Morgan Stanley believes that since customers have also adjusted their expectations, no longer expect a short-term drop in memory prices, and may even accelerate procurement to avoid the risk of future price increases, Lenovo has gained sufficient room for price transfer, so that it can completely transmit higher component costs without sacrificing profit margins.
Morgan Stanley also noted that in the current environment, the ability to secure memory supply is at least as important as price.
Lenovo has structural advantages in this respect, including the procurement scale effect brought by its status as the world's largest PC manufacturer, long-term supplier relationship, and access channels to China's domestic memory supply chain.
These factors allow Lenovo to lock in component supplies more effectively than most of its peers, while maintaining a lower cost structure, thus prioritizing profit margins without the need to launch a price war.
The rapid rise of ISG and the accelerated transformation of profitability structure
Lenovo's earnings structure is undergoing deep-seated changes, with the rise of the Infrastructure Solutions business (ISG) as a core driver.
Morgan Stanley expects ISG revenue to grow substantially by 74% to approximately $33.3 billion in fiscal 2027 from approximately $19.2 billion in fiscal 2026, and further by 29% and 26% to $43 billion and $54.3 billion in fiscal 2028 and 2029, respectively.
This growth trend benefits from the continuous strong demand for enterprise servers, continuous investment in hyperscale data centers, accelerated deployment of AI servers, and the increase in average selling price of systems supported by high component costs.
The turnaround in earnings contribution will even exceed the revenue level.
Morgan Stanley forecasts that ISG will grow from near breakeven in fiscal 2026 to contribute about 35% of the group's profits in fiscal 2029, at which time ISG operating margin will expand to about 6.9% from 0.4% in fiscal 2026.
(The expansion of ISG's business scale and the optimization of business structure are expected to promote profit improvement, thus improving ISG's profitability)
In contrast, the smart device business (IDG, or PCs and tablets) is expected to decline from 67% in FY2026 to 50% in FY2029.
(Lenovo's Revenue Composition, FY 2024-2029)
Lenovo's AI server orders have reached about $21 billion, providing high visibility for future demand.
Morgan Stanley noted that on the hyperscale customer side, it is expected thatMicrosoftAndOracleLenovo is also expanding its exposure to cloud services and sovereign AI projects. Management stated that there is currently no significant risk of customers moving orders directly to ODM.
PC Business: Profit Priority, Actively Give Quantity and Insure Price
In PC Main BusinessMorgan Stanley expects Lenovo PC shipments (including desktops and notebooks) toIt decreased about 9% year-over-year to 63.4 million units, primarily due to constrained memory supply rather than weak end demand.
(Lenovo Computer Shipments and Year-over-Year Change, FY2024-FY2029 Forecast)
Despite the decline in shipments, PC revenue is still expected to grow by approximately 8% year-over-year to $55 billion in fiscal 2027, with operating margin maintained at approximately 7.7% and operating profit of approximately $4.3 billion due to higher average selling prices and optimized product mix.
(Despite the decline in shipments, Lenovo's PC business revenue will continue to grow in fiscal 2027-2029, driven by higher average selling prices)
Morgan Stanley believes that Lenovo's market share in the constrained supply environment is expected to increase from 24.1% in fiscal year 2026 to about 26.0% in fiscal year 2027 with the advantages of procurement scale and supplier relationship.
Against the backdrop of an expected decline of around 3% to 4% year-over-year in global shipments in the PC market (FY2028), Lenovo's PC shipments are expected to remain roughly flat, reflecting a continued market share advantage.
Lenovo's smartphone business is under greater pressure.
Unlike the PC business, as the smartphone market is more competitive,Morgan Stanley believes Lenovo cannot completely pass on higher component costs to end consumers.
Mobile phone shipments are expected to decline by approximately 13% year-over-year in fiscal 2027, operating margin to 1.7% from 3.6% in fiscal 2026, and operating profit to slide by approximately 55% year-over-year to approximately $127 million.
(Lenovo Smartphone Shipments Change YoY, FY2024-FY2029 Forecast)
The forecast is significantly higher than the market, and there is room for valuation revaluation
Morgan Stanley's earnings forecast is a significantly high optimist in the industry.
While revenue forecasts for FY2027 to FY2029 are only about 5% higher than consensus estimates, net income forecasts are about 20% higher, with the core difference being higher margin assumptions.
Specifically, Morgan Stanley forecasts net income margins of 3.0%, 3.4%, and 3.8% for FY2027 through FY2029, compared to the consensus estimates of 2.6%, 3.0%, and 3.3%, respectively;Operating margin forecasts were all 50 to 60 basis points above consensus estimates over the period.
In terms of its upcoming fiscal 2027 first quarter results (F1Q27), Morgan Stanley analyzes:
Revenue Forecast$23.7 billion, 6% higher than consensus estimates;
Net Profit Forecast$681 million, 26% higher than consensus estimates;
Gross profit margin forecastIt was 16.6%, a year-on-year increase of 190 basis points, and the probability of upside surprises was considered "extremely high".
(Morgan Stanley's revenue estimate for Lenovo is 6% higher than the market consensus, and its net profit estimate is 26% higher)
Valuation Aspects, the HK$30 target price corresponds to 13.5x FY2028 expected P/E, which is higher than Lenovo's historical average of about 9.5x over the past three years, but still belowDell TechnologiesThe implied price-to-earnings ratio of about 20 times in the infrastructure business.
In the segment valuation (SOTP) verification, Morgan Stanley applied 10x, 16x and 15x FY2028 P/E to PC business (IDG), ISG business and service business (SSG) respectively, resulting in a mixed valuation of approximately 13x, which is highly consistent with the conclusion of the residual income model.
(Morgan Stanley thinks Lenovo's valuation deserves to be reassessed to 13 times or more)
Morgan Stanley pointed out in the report that as ISG's profit contribution continues to increase, investors may gradually re-examine Lenovo from the perspective of infrastructure and AI solution providers, thus pushing its valuation closer to Dell.
(Comparison of expected P/E between Dell and Lenovo)
The medium-and long-term targets released by management on Investor Day on June 25 equally support this logic:
1-2 Year TargetWith a revenue of US$100 billion and a net profit margin of 3% +;
3-5 Year TargetWith a revenue of US$130 billion and a net profit margin of 5% +;
Target over 5 yearsWith a revenue of US$150 billion and a net profit margin of 8% +.
Morgan Stanley believes that the 1-to 2-year target is conservative, and the current forecast shows that Lenovo can basically achieve the above indicators in fiscal year 2027.
(Morgan Stanley believes Lenovo is on track to approach its revenue target of $100 billion this fiscal year)
