Lenovo Undervalued, But This May Be The New Normal

Lenovo’s (OTCPK:LNVGY) market-leading PC business looks well-placed to continue being a cash cow for the business, but management’s forays into the data center (servers) and mobile have proven to be poor capital allocation decisions. Although the data center business can likely do better in the future and the mobile business could outperform on attractive model launches, management really needs to show tangible results from its “3S” strategy if it wants to get the benefit of the doubt and better valuation multiples.

While I thought Lenovo could be due for some underperformance when I last wrote about the shares, the stock has suffered more than I expected from increased trade tensions between the U.S. and China in the interim, as well as weaker market demand for servers (particular hyperscale). Although Lenovo has consistently outperformed on margins, the market is not excited by a business still driven so significantly by the PC business. I do believe Lenovo shares are undervalued and offer a respectable dividend, but my enthusiasm for the shares is at least somewhat tempered by management’s inability to execute effectively with the server and mobile businesses.

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Lenovo Undervalued, But This May Be The New Normal