Lenovo Gains Market Share In Computing Race To Reap Profits From AI

Key Takeaways:

• Lenovo consolidated its place as the world’s leading PC maker in the third quarter, boosting its share of the market to 24% from 22.7% a year earlier, according to IDC
• The company’s gross margins trail its rivals as it sacrifices profitability to gain a foothold in the business of providing infrastructure for cloud and data center operators

By Doug Young

Profits or market share, which is more important?

If you’re a computer investor, the answer appears to be market share, at least right now. That factor is currently playing to the advantage of Lenovo Group Ltd. LNVGF, which further consolidated its position as the world’s leading PC seller in the third quarter, according to new data from industry tracker IDC this week.

Lenovo and longtime rivals HP HPQ and Dell DELL have been locked in a race these last few years to find the next “big thing” for their maturing traditional PC businesses, and have largely settled on artificial intelligence (AI) as that next major driver. Accordingly, all three are rushing to develop not only AI-optimized PCs, but servers and software that are the backbone of cloud and data centers that are increasingly taking over the role of computing once done on traditional laptops and desktop PCs.

In such a landscape, it’s perhaps not unreasonable that investors are focused on market share over profits, since such market share is a key pathway to selling new AI-based products when demand begins to pick up. But while Lenovo, HP and Dell are all touting their AI efforts, consumers and businesses have yet to start buying such products in big numbers, IDC said.

“While we expect AI to reach ubiquity at some point at the end of this decade, the ramp up towards mass market will take longer than expected, well into 2026,” said Linn Huang, IDC’s research vice president of devices and displays, in a statement with its global PC sales data for the third quarter.

Huang said the major obstacles holding back higher adoption for AI-optimized PCs is a lack of software and applications that can take advantage of such high-powered products. It noted that much of the broader PC industry’s growth recently has been coming at the lower end of the market, rather than at the premium end that includes AI models.

That broader market actually contracted by 2.4% in the third quarter to 68.8 million units shipped, according to IDC. Lenovo managed to buck that trend by boosting its shipments 3% during the quarter to 16.5 million units, raising its share of the market to 24% from 22.7% in the year-ago quarter.

HP also managed to post 0.4% growth, also defying the overall market’s contraction, raising its global market share to 13.6% from 13.5%, making it the second largest brand. Dell’s PC shipments fell 4% to 9.8 million units, dropping it share to 14.3% of the market, while Taiwan’s Asustek was a relative winner, finishing fourth with 10% growth to take 7.9% of the market.

Lenovo’s stock fell 7% in the three trading days after the announcement, though much of that was in sync with a broader selloff for Chinese shares following a major rally for the group over the month before that. The stock is down slightly so far this year, in sharp contrast to a 25% gain for the broader Hang Seng Index due to the recent stock rally.

Still Highly Valued

Lenovo’s lackluster stock performance this year could owe partly to the fact that it’s no longer considered a China stock, since it’s truly a global company that derives its revenue from all major global markets. Still, the company’s base in China has raised a few concerns amid recent tensions with the West, which may have been a factor in the company’s recent plan to build a major new production base in the Middle East.

In terms of valuation ratios, Lenovo is still a relative favorite among investors with a price-to-earnings (P/E) of 17. That’s ahead of 13 for HP and 14 for Asustek, though it trails the 23 for Dell, whose shares have gotten a major boost over the past year on big hopes for its AI-optimized servers.

Investors certainly aren’t interested in Lenovo for its gross margins, which are a key indicator of how profitably a company conducts its core business. The company’s gross margin stood at 17.2% in its latest fiscal year, well behind the 21.4% for HP and 22.4% for Dell and also trailing the 17.8% for Asustek. What’s worse, Lenovo’s gross margin actually dropped to 16.6% in its latest fiscal quarter through June from 17.5% a year earlier.

That brings us back to the market share versus profits issue we raised earlier, since a big factor behind Lenovo’s eroding profitability appears to be its focus on gaining share in an important segment of the market. That segment is infrastructure owners, which includes cloud computing center operators, which are some of the most aggressive buyers of AI technology and could become just as important as consumer and enterprise PC buyers in the future.

Lenovo reported its overall revenue rose 20% year-on-year to $15.4 million in the three months to June, largely driven by a 65% jump in revenue to more than $3 billion for its infrastructure solutions group, one of the company’s three main business segments. Its other two segments, including the one that accounts for most of its PC sales, both grew by far slower rates of about 10%.

That means the infrastructure division, whose core products include servers and storage devices, now accounts for about one-fifth of the company’s overall sales, and the ratio is likely to grow further still. In fact, Lenovo said in its latest report that such non-PC products accounted for a record 47% of its revenue in its latest quarter, putting such products on track to overtake PC sales quite possibly by the end of 2024.

The problem right now for Lenovo is that its infrastructure division that achieved such stellar sales growth is also the only one of its three main segments that reported an operating loss in its latest fiscal quarter. But at least that loss is shrinking, falling to $37 million in the three months to June from $60 million a year earlier.

At the end of the day, Lenovo and its peers are doing whatever they feel is necessary to position themselves for the AI era that will be the next big growth driver for their industry. Investors seem willing to accept that companies may need to sacrifice profits to improve their positioning to do that, at least for the next year or two.

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