Lenovo’s surge was part of a broader rally among its peers amid signs that a post-pandemic industry slump may have finally ended. — Reuters
HONG KONG: A three-month rally in Lenovo Group Ltd shares may have legs, thanks to signs of a global demand recovery for personal computers and enthusiasm about the Chinese firm’s products tied to artificial intelligence (AI).
The world’s top PC maker’s stock in Hong Kong has risen over 30% from a mid-October low, making it the best performer in the Hang Seng Tech Index during the period.
Its 60% jump this year also puts it on track for the strongest annual performance since 2009.
Lenovo’s surge was part of a broader rally among its peers amid signs that a post-pandemic industry slump may have finally ended, helped by cyclical demand for PC replacement and upgrades.
High hopes for new products that may benefit from the ongoing AI investment frenzy also are fuelling optimism that the stock’s bull run can last well into 2024.
“The strong sentiment, in my opinion, was mainly driven by the impending recovery of PC demand starting likely from late 2023, and the rising fervour surrounding the concept of ‘AI PC’,” said Steven Tseng, a Bloomberg Intelligence analyst.
Lenovo said last month that it is targeting PC revenue growth this quarter after signs of a long-awaited recovery helped it report a smaller-than-feared profit decline.
The company continues to see single-digit global PC shipment growth next year and remains confident in outpacing rivals given its leading market position and higher exposure to commercial models, Goldman Sachs Group Inc analysts including Verena Jeng wrote in a recent note after a meeting with Lenovo’s management.
Global PC makers have been grappling with a downturn that emerged after the Covid era, but the downward spiral slowed in the third quarter, according to research firm International Data Corp.
With over 75% of its revenue from overseas, Lenovo also is less exposed to China’s slowing economy.
Another major boost to the stock’s momentum lies in investor excitement about its first AI server project that started this month and more products in the pipeline for next year.
“We are ‘buy’ rated on Lenovo as we believe it is well positioned to ride on AI technology enhancement,” Goldman’s Jeng wrote.
“We expect AI’s higher requirements of computing power and new AI functions will support demand for Lenovo’s end devices.”
Goldman’s price target of HK$11.79 implies a 15% upside from the stock’s last close.
Traders also are expressing their bullishness in the options market, where the right to buy Lenovo shares in three months is now at a significant premium above its cost a month ago.
Meantime, put options, which offer investors the right to sell the stock, have become cheaper.
To be sure, Lenovo no longer looks cheap. The stock now trades at 11 times forward earnings, compared with an average of nine times over the past five years.
“The expectation is indeed very high,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management.
“But if the management can deliver what they guided so far, and if the early market feedback is positive on the local AI applications on the high-spec AI PC and its associated 10% to 15% average selling price bump, the outperformance may continue.” — Bloomberg
