Lenovo: The Underestimated Powerhouse
Summary
- Lenovo gained more than 160% since the lows of March 2020 and more than 85% since my first coverage of the company in 2019.
- Despite the increased valuation, shares have more room to rise even further because of Lenovo's long-term potential.
- Current market conditions and working from home will be tailwinds for the Chinese large-cap company in 2021.
- All in all, the PC market leader is still a buy.
Investment thesis
As a long-term Lenovo (OTCPK:LNVGY) shareholder, it felt like riding a rollercoaster after I first bought the stock in 2014. The stock rose to $1.74 in 2015 before falling like a rock below $0.50 in 2018 and March 2020. Since my first coverage on Seeking Alpha, the company gained more than 85%. I outlined the strong profitability of the business as well as the cheap valuation according to the fundamentals.
The stock currently trades for $1.24 (as of 04/12/21) and the market cap stands at nearly $15 bn. with 12.042 bn. shares outstanding.
By increasing its market share in a growing market, Lenovo will be able to improve margins while increasing revenue which will result in booming profits.
After years of decline, the market of personal computers, servers and notebooks will face an unprecedented boom which will last for two years at least. The pandemic will change working conditions in the long run as working from home and distance learning will become more popular. More people, students and employees, will need new notebooks and personal computers to optimize their learning and working environment.
Lenovo, the market leader for personal computers, is likely to strongly profit from the "new normal" during the pandemic.
Business environment
In 2020 the PC market grew by 4.8% to 275 million units.
Table 3. Preliminary Worldwide PC Vendor Unit Shipment Estimates for 2020 (Thousands of Units)
Company | 2020 Shipments | 2020 Market Share (%) | 2019 Shipments | 2019 Market Share (%) | 2020-2019 Growth (%) |
Lenovo (OTCPK:LNVGY) | 68,507 | 24.9 | 63,182 | 24.1 | 8.4 |
58,357 | 21.2 | 57,949 | 22.1 | 0.7 | |
Dell (DELL) | 45,029 | 16.4 | 44,095 | 16.8 | 2.1 |
Apple (AAPL) | 22,454 | 8.2 | 18,337 | 7.0 | 22.5 |
Acer Group | 16,264 | 5.9 | 14,743 | 5.6 | 10.3 |
Asus (OTCPK:ASUUY) | 16,424 | 6.0 | 14,449 | 5.5 | 13.7 |
Others | 48,111 | 17.5 | 49,797 | 19.0 | -3.4 |
Total | 275,147 | 100.0 | 262,552 | 100.0 | 4.8 |
Lenovo grew 8.4%, outperforming the market and gaining market share (24.9%). The numbers for the fourth quarter are even better.
Company | 4Q20 Shipments | 4Q20 Market Share (%) | 4Q19 Shipments | 4Q19 Market Share (%) | 4Q20-4Q19 Growth (%) |
Lenovo | 21,491 | 27.1 | 17,713 | 24.7 | 21.3 |
Lenovo's growth is currently accelerating and the company will probably achieve a new shipment record in 2021. Moreover, the company is also growing its server business faster than the server vendor market.
Top 5 Companies, Worldwide Server Vendor Revenue, Market Share, and Growth, Third Quarter of 2020 (Revenues are in US$ Millions) | |||||
Company | 3Q20 Revenue | 3Q20 Market Share | 3Q19 Revenue | 3Q19 Market Share | 3Q20/3Q19 Revenue Growth |
T1. Dell Technologies | $3,757.8 | 16.65% | $3,779.1 | 17.12% | -0.6% |
T1. HPE/New H3C Group (HPE) | $3,596.9 | 15.94% | $3,737.9 | 16.93% | -3.8% |
3. Inspur/Inspur Power Systems | $2,114.7 | 9.37% | $1,973.3 | 8.94% | 7.2% |
4. Lenovo | $1,326.0 | 5.88% | $1,189.8 | 5.39% | 11.4% |
5. Huawei | $1,098.9 | 4.87% | $916.7 | 4.15% | 19.9% |
ODM Direct | $6,303.3 | 28.03% | $5,816.0 | 26.34% | 8.4% |
Rest of Market | $4,367.9 | 19.36% | $4,663.8 | 21.13% | -6.3% |
Total | $22,565.6 | 100.00% | $22,076.6 | 100.00% | 2.2% |
Source: IDC Worldwide Quarterly Server Tracker, December 8, 2020 | |||||
Although Lenovo is just in the fourth position, it increased market share and grew faster than Dell, HPE and Inspur. Only Huawei achieved higher growth YoY with 19.9%.
Another division with a stunning performance was Lenovo's mobile business group which grew by 10% YoY in the fourth quarter of 2020 (Lenovo's Q3 FY 2020/2021) while total smartphone sales declined by 5.4%.
Software and Services also grew YoY by 36%, representing more than 8% of Lenovo's total revenue.
Summarizing the current business environment, it is no exaggeration to say that Lenovo is "firing on all cylinders" and these tailwinds will last for the quarters to come. However, the markets do not really appreciate the company's success and growth prospects.
Earnings and valuation
The third quarter results, published on February the 3rd, showed that Lenovo's revenues increased by 22% YoY to over $17 bn., while net income increased 52% to around $400 mln. (EPS 21 Q3: $0.066 per ADS). The net income margin increased to 2.3% which is still quite low. If current market conditions remain, Lenovo will be able to increase margins even further. The valuation for 2021 seems to be reasonable. Lenovo's management will consider a dividend increase to 0.30 HKD (or $0.80 per ADS share), boosting the yield to 3.1%.
| company | share price $ | P/E | P/S | P/B | ROE | yield | growth (e) |
| Lenovo | 25.52 | 10.3 | 0.23 | 3.8 | 25% | 3.1% | 20-25 % |
| DELL | 94.40 | 21.6 | 0.77 | 3.3 | 41% | 0.0% | 0- 5 % |
| HP Inc. | 33.00 | 10.3 | 0.66 | negative | negative | 2.1% | 5-10 % |
| Apple | 133.00 | 33.2 | 8.13 | 34.1 | 87% | 0.6% (+3.2% via buybacks) | 15-20 % |
Compared to main competitors like DELL, HP Inc. and Apple, Lenovo not only will grow faster, the stock is also much cheaper in four of six fundamental categories. Apple just has a higher yield because of aggressive share buybacks. This could also be an option for Lenovo in the second half of the year, if the company successfully files for an IPO in Shanghai. The management already mentioned that it will use the proceeds for research and innovation though.
Conclusion
Lenovo is on track for a very successful 2021. The turnaround started three years ago and now the company can reap the benefits from this process. Lenovo will become a global powerhouse and maintain the leadership as the most important PC vendor. It could also become one of the top three server vendors in the world. In the meantime, investors can buy the stock for 10x earnings, receiving an industry-leading yield of over 3%.
This article was written by
Analyst’s Disclosure: I am/we are long LNVGY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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