- LNGVY’s stock price is +82.71% since my May 20, 2020 buy recommendation. I again endorse it as a great-value buy.
- Lenovo’s stock has -31.49% 3-month price performance. It trades at 8.95x Forward P/E valuation.
- Lenovo is not on Pres. Biden’s list of blacklisted Chinese firms. Lenovo has access to all U.S. hardware/software technology.
- Lenovo is no. 1 in PC shipments and no. 3 in servers. Lenovo is also involved in cloud computing services and HPC/AI analytics.
- Lenovo can and should imitate the 5%-margin-on-hardware tactic of Xiaomi.
I reiterate the May 2020 buy recommendation I gave to Lenovo. The stock is +82.71% since that article’s publication. This feat is in spite of the recent negative momentum of LNVGY. Lenovo’s -31.49% 3-month price slide is a blessing. It gives us a cheaper buy-in window.
We need to invest on this PC industry leader. The global computer industry is still worth $367 billion and its growing at 10.9% CAGR. Windows 11’s upcoming release can reverse the negative momentum of Lenovo.
Lenovo is also not on Pres. Biden’s revised list of blacklisted Chinese companies. This is very important. Unlike Huawei, Lenovo gets 100% access to all U.S. software and hardware products and services. Reduced competition from Huawei server and PC products ultimately benefits Lenovo.
Seeking Alpha’s Quantitate Rating System AI is Neutral on LNVGY. This is due to Lenovo’s grade of F under the Growth parameter. The Growth Grade page of Lenovo says its FWD Revenue Growth is only 9.14% (C+), and Revenue Growth (YoY) 19.77%. Seeking Alpha’s programmers need to tweak the algorithm. Based on the chart below, Lenovo deserves a Growth grade higher than F.
I am still bullish on LNVGY because of its A+ grade for Value. Lenovo’s Forward P/E is only 8.95 while Dell (NYSE:DELL) has 24.32x. The TTM Price/Sales valuation of Lenovo is only 0.20. This is much lower than Dell’s 0.75 and the 0.61 of HP Inc. (NYSE:HPQ). Dell and HP have zero smartphone business and yet Lenovo is valued less than these American companies.
Lenovo deserves more love from investors. It’s a slow-growth PC leader that is now imitating Xiaomi’s (OTCPK:XIACF) aggressive expansion to smart devices. Lenovo is marketing secure ThinkSmart webcams and sound bars. Lenovo’s IoT product range caters to home and business customers.
LNVGY is a buy because it is getting involved in the fast-growing Smart Home Industry. Fortune Business Insights estimates the Smart Home global business is growing at 29.3%. It could be worth $622.59 by 2026. Going forward, Lenovo’s Android OS-powered 10-inch Smart Display could eventually lead to 52-inch Lenovo Android Smart TV products.
Windows 11 Is A Tailwind
Lenovo is a buy because of its +14.9% Y/Y growth in Q2 global PC shipments. The second quarter does not have the Christmas shopping boost and yet Lenovo still managed to ship out more than 20 million computers. Lenovo was also no. 1 in Q1 with 20.40 million PCs shipped out. Lenovo is a Chinese company and it outperformed HP Inc.
Going forward, the strict TPM 2.0 hardware requirement of Windows 11 can help Lenovo ship out 21.5 million PCs/quarter. Microsoft wants TPM 2.0 because it offers better hardware-based security than TPM 1.2. Gamers, content creators, and business PC users will likely buy new computers if they want Windows 11.
The TPM 2.0 is a separate chip that is soldered to the motherboard or integrated with modern System-on-Chip Intel (NASDAQ:INTC) or Advanced Micro Devices (NASDAQ:AMD) processors. There are currently very few TPM 2.0-equipped PC motherboards available.
Microsoft’s list of supported Windows 11 processors is very short. Gaming and business computers older than 5 years are not going to qualify for Windows 11.
Microsoft’s TPM 2.0 is a tailwind for Lenovo’s pricey Legion gaming computers and laptops. The fortified hardware-based security of TPM 2.0 makes Windows 11 attractive to government and corporate employees. Windows 11 therefore is also a catalyst for Lenovo’s ThinkPad business laptops.
Windows 11 is a significant help for Lenovo. The PCSD (PCs and Smart Devices) segment accounts for 80% of Lenovo’s annual revenue.
More Infectious COVID-19 Variants Is Boosting Cloud Computing
The Alpha, Beta, Delta, and Gamma variants of COVID-19 will again boost learn-at-home and work-from-home computing. The very infectious Delta variant comprised 83% of new COVID-19 cases in the United States. Other countries are also seeing their fully-vaccinated citizens get infected with the Delta variant. News variants of COVID-19 are undesirable but they do compel more people to stay at home. Instead of 50% of the time, American firms like Adobe (NASDAQ:ADBE) might again allow their employees to work at home 100% of the time.
Most people still work at home with a desktop PC or laptop. I write investing ideas with a non-Windows 11 compliant Windows 10 desktop PC. Today is my family’s 9th day of voluntary home isolation. There’s a big surge in COVID-19 infections in our province. The Alpha, Beta, Delta Variants are just 3 to 7 kilometers away from our town.
Learn-from-home and work-from-home can boost Lenovo’s data infrastructure services. Lenovo has matured beyond its hardware-centric business model. LNVGY is a buy because it is now involved in the growing (17% CAGR) cloud computing market. Cloud computing is expected to be worth $287.03 by 2025.
Lenovo’s Data Center services is very comprehensive. Based on the screenshot below, Lenovo is an all-in-one provider for cloud computing infrastructure and SaaS subscription services.
TPM 2.0 Is Good For Lenovo ThinkSystem Servers
Microsoft also announced last June 2020 that future Windows Server versions also requires TPM 2.0. This is edict benefits Lenovo’s ThinkSystem servers for data centers. Contrary to popular misconception, Windows Server, not Linux, is the most-used operating system in the data center industry, with more than 56% share of data center workload. Windows Server OS is used on more than 70% of servers worldwide.
Lenovo is no. 3 in global server shipments. TPM 2.0-centric Windows 11 ThinkSystem server products can boost the $1.6 billion/quarter sales of Lenovo’s DCG (Data Center Group) segment. Servers is still a growing industry that is worth $91.02 billion last year. Windows 11’s TPM 2.0 requirement could help Lenovo increase its servers market share to above 8%.
Lenovo needs to be more competitive in servers. DCG’s $1.6 billion quarterly revenue contributes little to the total quarterly revenue of $15.6 billion. Investors wants to see PCSD segment’s contribution go down below 80%. PCSD can only go down below 70% if DCG and MBG (Mobile Business Group) starts generating $2 billion/quarter each. As per latest ER, MBG only generates $1.54 billion/quarter.
The Lenovo/Moto smartphone brands can be more successful if they copy Xiaomi’s forever-5%-margin-on-hardware strategy. Lenovo/Moto managers should focus on selling affordable 5G phones.
MBG’s performance is not optimized. There’s little hope for the $340 moto G Plus 5G. Xiaomi can sell the POCO M3 Pro 5G for $182 in the United States. The POCO M3 Pro 5G retails for $158 here in the Philippines.
Selling entry-level 5G phones will help MBG generate more sales. Greater smartphone sales can lead to a reduced dependence on that 80% revenue contribution of the PCSD segment. Like Xiaomi, Lenovo can just operate its own app store to make up for low-margin smartphone hardware sales.
Xiaomi is profitable because the app store business touts a CAGR of 18.4%. The global app store industry is expected to be worth $407.31 billion by 2026.
The Windows 11 tailwind can improve the low-profitability and growth performance of Lenovo. There’s currently a limited number of Windows 11-compatible laptops on the market today. LNVGY’s price might shoot up if Lenovo is first-to-market new Windows 11 laptops before the school year starts again.
Windows 11 can improve Lenovo’s super-low 1.99% net income margin. LNVGY might trade near its 52-week high of $28.80 if it can deliver a net income margin of 4% or higher.
The biggest challenge for Lenovo’s management is to reduce that 80% PCSD revenue contribution. LNVGY’s very low 0.20x TTM Price/Sales valuation will only improve after investors see larger contribution from Lenovo’s MGB and DCG segments. Imitating Xiaomi is an easy way for Lenovo to generate $2 billion in quarterly smartphone sales.
Author: Motek Moyen, Seeking Alpha