Lenovo's AI seeds Begin Bearing Fruit, As Geopolitics Continue To Weigh

Key Takeaways:

• Global PC leader Lenovo’s profit jumped 41% in the six months through September, as its revenue rose 22%
• Revenue from the company’s non-PC segments accounted for 46% of its total in the first half of its fiscal year, an all-time high

By Lee Shih Ta

Lenovo Group Ltd.’s (0992.HK) Chairman and CEO Yang Yuanqing recently reiterated his growing confidence in artificial intelligence, noting that “AI is not a bubble but an opportunity for sustainable growth.” While tech trends come and go, his company’s “hybrid AI” bet looks increasingly solid, with the potential to transform Lenovo from a stodgy PC maker into a company to watch.

Investment in AI has become key for technology companies looking to repolish their tech stripes, and Lenovo’s latest results for the six months through September, the first half of its fiscal year, seem to show it’s moving in the right direction.

Its revenue for the six-month period rose 22% year-on-year to $33.3 billion, while its profit rose by an even bigger 41% to $600 million. The three months to September were especially impressive, as revenue jumped 24% to $17.85 billion, and the company’s profit surged 44% to $360 million.

During the six-month period, the company’s three major business groups, intelligent devices, infrastructure solutions, and solutions and services, all recorded double-digit growth.

Intelligent devices grew 14.5% year-on-year, powered by Lenovo’s legacy PCs and smartphone businesses. Lenovo’s share of the global PC market grew to 24% during the period, expanding its lead over its closest rival by 4 percentage points. Revenue from its smartphones and tablet PCs were also notable for recording 43% and 19% growth, respectively, ahead of its core PC business.

Future Belongs To AI PCs

Lenovo noted that it launched two AI PCs in May, which now account for a double-digit share of the company’s laptop shipments in China. The company expects AI PCs to account for 10% of its total shipments by the end of 2024, rising to 60% by 2026 and as high as 80% by 2027 as the number of AI-powered apps explodes.

Despite a 1.5% drop in global PC shipments during the quarter to September, Lenovo was able to buck the trend by posting 3% growth over that time, even as rivals Dell DELL and Apple AAPL both notched declines.

Lenovo’s infrastructure solutions unit was its star in the first half of its fiscal year in revenue terms thanks to its focus on servers used in data centers that are quickly becoming the center for offsite AI computing. That division’s revenue grew 65% year-on-year due to the growing investment in AI-enabled infrastructure, while its loss decreased by 36% to $73 million year-on-year.

The solutions and services unit recorded a 12% increase in revenue, driven by robust demand for its software-as-a-service (SaaS) products and AI-powered solutions.

The solid growth for all three business groups reflects Lenovo’s growing bet on AI technology, as well as its efforts in global expansion and business diversification.

CEO Yang said he believes that AI is not only about cloud services. Instead, Lenovo is placing its bets more broadly on a hybrid AI model that’s a combination of intelligence in both the public and private computing spheres. Put differently, the company is dividing its AI bets between the computing done on the cloud, as well as on individual PCs and other devices as the direction of its future development.

Last month, Yang and Jensen Huang, CEO of AI superstar chipmaker Nvidia NVDA, jointly unveiled Lenovo Hybrid AI Advantage with Nvidia, a comprehensive full-stack platform with enterprise-level AI functions, at the Lenovo Tech World 2024 conference. The platform is based on Lenovo’s services and infrastructure capabilities, paired with Nvidia’s AI software and hardware technologies.

“We want to fundamentally achieve productivity surpassing human capabilities,” Huang said at the partnership’s unveiling. “This is going to be the most massive industrial revolution we have ever seen.”

Putting Eggs In Different Baskets

Lenovo’s hybrid approach to AI also shows it’s putting its eggs in different baskets to diversify its business. The company has announced a series of products around the hybrid AI strategy, such as its Hybrid AI Advantage for enterprises, Lenovo AI Now and Lenovo Learning Zone software platforms, as well as its next-generation Lenovo Neptune liquid cooling technology for servers.

During the six months through September, revenue from the company’s non-PC business accounted for 46% of total revenue, marking a record high. Revenue from the company’s storage, software and services in its infrastructure solutions unit was especially notable for its 35% year-on-year growth during the period, while revenue from Neptune liquid cooled servers also grew more than 48% year-on-year, both reaching record highs. That shows Lenovo’s latest diversification strategy is starting to bear fruit.

That said, the business expansion also seems to be eroding the company’s profitability. In the six months to September, the company’s gross margin fell 1.4 percentage points to 16.1% year-on-year mainly due to lower gross margins from the infrastructure solutions business and an 8% rise in R&D spending.

As growing sales of its cloud-based servers erode Lenovo’s overall gross margin, Goldman Sachs lowered its target price for the company by 9.2% from HK$13.98 to HK$12.70, while maintaining its “buy” rating. BofA Securities, meanwhile, worries that potential U.S. tariffs may push up the Lenovo’s costs, and lowered its target price from HK$11.6 to HK$10, with a “neutral” rating.

Lenovo currently trades at a price-to-earnings (P/E) ratio of 14.3 times, lower than Dell’s 24 and less than half of Apple’s 37.6 times, showing it has yet to win over investors to its AI story. But it leads the 13.5 times for Taiwan’s Asus (2357.HK).

Through its more diversified approach to AI, Lenovo is trying to show that it’s not just a hardware manufacturer, but also technology company that can integrate hardware, software and services. Investors generally believe that demand for new applications driven by AI PCs and Microsoft’s Window 11 system will be favorable to Lenovo’s performance next year. But factors like geopolitics could cast a shadow over the company’s stock due to its status as a Chinese company selling a high-tech product into major Western markets. Such non-commercial factors could be key to determining if the company’s strong performance can continue.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.