Cancan Chu
Elevator Pitch
I still assign a Hold investment rating to Lenovo Group Limited (OTCPK:LNVGY) [992:HK] shares. In my previous article for Lenovo Group published on February 20, 2023, I assessed the company’s financial performance for the third quarter of fiscal 2023 (YE March 31).
The focus of the current update is the evaluation of Lenovo Group’s Q1 FY 2024 results and its investments in Artificial Intelligence or AI. On one hand, Lenovo Group’s first quarter results fell short of expectations, and the company’s second quarter performance could continue to be weak. On the other hand, Lenovo Group’s commitment to increased AI investments has positive read-throughs for the company’s growth prospects in the long run. Considering both the short-term challenges and long-term growth potential for Lenovo, I continue to rate the stock as a Hold.
Investors should note that Lenovo Group’s shares are listed and traded in Hong Kong and on the OTC market. The three-month average daily values of Lenovo Group’s shares traded on the Hong Kong Stock Exchange and the OTC market were $40 million and $1.2 million (source: S&P Capital IQ), respectively. Interactive Brokers is one of the US brokerages that readers can utilize to deal in Lenovo Group’s Hong Kong-listed shares.
Analysts Were Expecting Strong Earnings Growth On A Sequential Basis
The sell side was of the opinion that Lenovo Group could achieve robust top line and bottom line expansion on quarter-on-quarter (QoQ) terms in the first quarter of fiscal 2024 before the company’s actual results release on Thursday.
In specific terms, the market forecasted that revenue for Lenovo Group would have grown by +7% QoQ from $12,635 million in Q4 FY 2023 to $13,514 million for Q1 FY 2024 as per S&P Capital IQ’s consensus data. Also, the analysts estimated that the company’s headline net income attributable to shareholders should have jumped by +105% QoQ to $234 million in the first quarter of the new fiscal year.
Lenovo Group’s actual top line and earnings did increase on a sequential basis in Q1 FY 2024, but the company’s revenue and bottom line growth were not as good as what the sell side anticipated as detailed in the next section.
But Lenovo Group’s First Quarter Results Were A Miss
Lenovo Group announced the company’s Q1 FY 2024 financial results on August 17, 2023.
The company’s revenue and reported net profit attributable to shareholders increased by +2% and +55% to $12.9 billion and $177 million, respectively in Q1 FY 2024 on a QoQ basis. However, Lenovo Group’s actual first quarter top line and bottom line turned out to be -5% and -24% lower (source: S&P Capital IQ) than the sell-side analysts’ consensus financial projections, respectively.
The weakness associated with Lenovo Group’s Infrastructure Solutions Group, or ISG business segment was the main reason for its Q1 FY 2024 earnings miss. In its annual report, Lenovo Group referred to the ISG segment as a business offering “industry-leading end-to-end infrastructure solutions” and “full-stack offerings including server, storage, and software.”
Revenue for Lenovo Group’s ISG segment decreased by -13% QoQ and -8% YoY to $1,914 million in the first quarter of fiscal 2024. The company’s ISG business was loss-making at the operating income level for Q1 FY 2024. In comparison, Lenovo Group had previously achieved positive operating profit margins for its ISG segment of +0.3% and +0.5% in Q4 FY 2023 and Q1 FY 2023, respectively. At its Q1 FY 2024 results call, Lenovo Group attributed the poor performance of its ISG business to “accelerated weakness in cloud server compute spending” and “global GPU (Graphics Processing Unit) constraint.”
Moving ahead, the ISG business segment might continue to be a drag on Lenovo Group’s Q2 FY 2024 financial results. Lenovo Group specifically noted at its first quarter earnings briefing that “there will be another quarter of inventory digestion” for servers. The company also cited market research from IDC (IDC) pointing to expectations of a “flat market” for servers in fiscal year 2024.
AI Investments Will Help To Drive Lenovo’s Long Term Growth
Lenovo Group’s long-term future seems bright, if one looks past the company’s recent Q1 FY 2024 results miss.
Earlier in June this year, Lenovo Group issued a media release disclosing that it will be committing to “an additional US$1 billion investment over three years to accelerate artificial intelligence (AI) deployment for businesses.”
There are early signs suggesting that Lenovo Group’s initial investments in AI are starting to bear fruit. As per its first quarter earnings call management commentary, Lenovo Group highlighted that its AI infrastructure revenue jumped +139% YoY in the most recent quarter, and mentioned that it is now the third biggest player in the worldwide AI infrastructure space.
With the incremental $1 billion being allocated to AI investments, Lenovo Group is well-positioned to roll out new AI offerings in an aggressive manner for the years ahead. This points to a favorable outlook for Lenovo Group in the intermediate to long term.
Concluding Thoughts
I leave my Hold rating for Lenovo Group unchanged. On the negative side of things, Lenovo Group’s near-term outlook is unfavorable. On the positive side of things, the company’s long-term prospects are promising, when one considers its growth opportunities associated with AI.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
