Lenovo's (OTCPK:LNVGY)
bold and controversial decisions to try to work its PC magic in the
mobile handset and server markets has thus far proved the doubters
right. Margins have eroded since the acquisition of IBM's (IBM) x86 server business and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL)
Motorola business, and the share price has fallen by two-thirds from
its mid-2015 high as investors have grown weary of the delays in
transforming the acquired businesses into profitable contributors and
grown more concerned about the long-term health of the PC business.
There
are still valid reasons to worry that Lenovo shares could be a value
trap, but expectations have been beaten down to a low bar. Lenovo's
strategy to target higher-performance, higher-value markets in mobile
and servers is a break with the company's past, but a logical one.
What's more, management has not had to surrender much market share in
PCs in its effort to support margins.
If Lenovo can
grow revenue at a long-term rate between 2% and 3% and pull its adjusted
free cash flow margins back up into the 2%-3% range, a fair value in
the range of $15 to $17 still makes sense, even with a double-digit
discount rate. The key question, though, remains whether or not the
company can turn its mobile and server businesses into positive
contributors (and/or jettison them) and restore investor confidence in
Lenovo's business model and strategy.
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A Drawn-Out Reset Of Expectations Should Lead To Better Days For Lenovo Shares
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