The World's Biggest PC Vendor Is Ridiculously Cheap
At about $18 per share, the world's #1 PC vendor, Lenovo (NASDAQOTH: LNVGY) , is extremely cheap at the moment. So cheap that you might consider going long, even after acknowledging that the PC world is shrinking (at the moment). With a 15.34x PE multiple, increasing attempts to diversify its portfolio,an emerging server business and significant strides to capture new users with Android handsets, the new Lenovo will definitely be worth more than $18 per share. Keep reading to understand why there is a new Lenovo in the making and why this situation provides an attractive risk/reward asymmetry .
The new Lenovo isn't just about PCs
What most people fail to understand about Lenovo is that the company isn't just about PCs. We can't deny the actual importance of the PC business as the main revenue driver (about 80% of its revenue base), but we should also acknowledge the importance that Lenovo is giving to smartphones, tablets and servers. Lenovo as a PC stock could have a fair valuation under a 15.4X P/E ratio -for comparison, Dell (NASDAQ: DELL) has a PE of 12.8, while the average S&P 500 P/E multiple valuation, according to Morningstar, is 17.2x. But a new Lenovo, with a strong diversified business portfolio, is definitely too cheap at the current PE multiple.
The current business strategy is twofold. On one hand, Lenovo aims to protect the PC business in consolidated markets and sell more, better PCs in emerging markets, where demand can still grow more. On the other hand, Lenovo also benefits from the "shift to tablet & smartphones" global trend under its "Attack PC+" strategy.
Reference: Lenovo Investor Relations, Presentation slides
The "Attack PC+" strategy involves replicating the same model and success factors that Lenovo applied to become the #1 global PC vendor in 23 years, in the smartphone & tablets arena. Only that this time, we hope to see more progress in less time. Just consider that Lenovo has already managed to become the #2 most sold maker in the fierce Chinese mobile device market, only behind Samsung . Globally speaking, Lenovo's 2% market share is still far from what management is aiming for, yet it is already equal to BlackBerry (NASDAQ: BBRY) and actually bigger than privately owned HTC and Motorola . Mobile shipments since the first quarter of 2012 have more than tripled!
Source: Seeking Alpha Contributor Retracement
The PC industry isn't dead, at least for Lenovo
So far we know that Lenovo's attempts to enter the smartphone & tablets markets (first in China and then globally) are quite promising. But the best part is that Lenovo's cash cow, the PC business , is (amazingly) still growing, despite an overall pessimistic PC usage trend. The record PC volume achieved last year of 52 million units shows this clearly. Furthermore, revenue is well diversified geographically speaking, with strong positions in Japan and the U.S. The next task is to strengthen Lenovo's position in emerging economies, from BRazil to Middle East / Africa, where PC penetration rates can still grow.
Reference: Lenovo Investor Relations, Presentation slides
The fact that Lenovo has managed to grow its PC revenues faster than its competitors shows that there's something special about its PCs. I believe that what is special about Lenovo PCs & notebooks isn't a special feature or an awesome design but the fact that for a very low price Lenovo does provide quality and high performance. As the PC market contracts, I believe consumers will become even more price & performance sensitive and this may actually be a great opportunity for Lenovo to steal more market share from competitors.
Finally, it's always good to ask ourselves if the PC market is actually dying or it is merely transforming itself. I believe that the PC industry will not fade away. It is evolving and the PC+ concept Lenovo is promoting seems to be getting it right. For more information about the future of the PC Industry, check Leo Sun's amazing article "The PC Market Will Survive, but the Old Gods Could Die".
Lenovo faces intense competition in each of its business segments: PC, smartphones, tablets and even servers. That can't be helped and it is one of the main reasons why Lenovo's margins are far from amazing.
But unlike most of its direct competitors, Lenovo seems to be a company engineered for maximizing growth rates: the byproduct of more than 2 decades of fierce competition in the PC arena. In a nutshell: an efficient machine committed to provide the best performance at the lowest possible price.
There are some specific advantages. Not all PC makers find it easy to shift to tablets or smartphones. For example, Dell might not be able to participate in the tablet market if Microsoft decides to manufacture its tablets in house, just like they did with the Surface product, a product that directly competes against the tablets of most PC manufacturers, including Dell. Not to mention that Dell's relationship with Microsoft is already complicated: Microsoft has agreed to advance Dell a $2 billion loan to be used for its leveraged buyout.
Even better, there are also some interesting opportunities that could help Dell to diversify its portfolio even faster. An example is Blackberry. It's no secret the Canadian manufacturer is struggling with poor sales for its smartphones. At the same time, Lenovo is getting more and more hungry for smartphone share. It has proved investors that in 2 years, it can achieve more than what Blackberry did in a decade. The secret? Being practical. Lenovo decided to use the Android ecosystem instead of making its own. In that way, they kept their competitive advantages as top manufacturers, while leveraging on the already unbeatable Android system. The poor sales of Blackberry are an opportunity for Lenovo to steal market, as it is no secret that Blackberry users prioritize performance.
Overall, Lenovo seems to be doing the right thing at the right time. Use and protect the cash cow to start new businesses, be practical and focus on making what you are really good at (by, for example, choosing not to develop its own software for smartphones) and take advantage of competitors' weaknesses to gain even more share. Ladies and gentlemen: the new Lenovo is in the making and it will be not only a PC vendor. It follows that its future P/E ratio will not resemble the multiple of a typical PC vendor.