It's easy to dismiss
Lenovo (
OTCPK:LNVGY)
right now. What sane management team would want to be in the PC
business when shipments are declining at a double-digit rate? What sane
management company would want to battle high-end smartphone champion
Apple (NASDAQ:
AAPL) and low-end dynamo
Xaomi
with the rusty blade that is Motorola at their side? Why would anybody
think there's money to be made in a server business that
IBM (NYSE:
IBM) didn't want?
What
I think many of the superficial analyses of Lenovo miss is that this is
a company with a proven ability to squeeze blood from a stone and
relentlessly drive costs lower. While PCs are likely never going to be a
growth market again, I do think there's still an opportunity for Lenovo
to gain share and take what growth is there. Likewise, I don't think
Lenovo ever unseats Apple in smartphones, but I believe Lenovo's cost
structure can allow it to be one of the last companies standing after
the industry shakes out the weaker players. Finally, I think there's
meaningful server growth opportunity in China and other emerging
markets, and here too I believe Lenovo has an opportunity to benefit
from stripping costs out of the IBM assets and running the business more
cost-effectively.
I've decided to take a more negative view of
Lenovo's revenue growth prospects, as the decline in PC shipments has
been exceeding my expectations from a year ago and the smartphone market
too has cooled more quickly than I expected. Nevertheless, even with a
lower revenue growth rate, the opportunity to add around a point and a
half to operating margin over time and a similar amount to FCF margin
supports a fair value above $28.
Lenovo has to achieve its
cost-reduction goals for the Motorola business on schedule to rebuild
investor/analyst trust, but I believe Lenovo has seen the bottom in
mobile and servers and will surprise with what it does over the next
three to five years. More importantly, I think Lenovo has a cost
structure and a cost philosophy that makes it a long-term survivor - as
virtually every market eventually becomes a commodity market over time,
cost leadership is ultimately what distinguishes the survivors and I
believe Lenovo has the corporate DNA to be the last (or at least one of
the last) players standing in PCs, x86 servers, and phones.
Follow this link for more:
Lenovo Looking To Have The Last Seat When The Music Stops
