China’s Lenovo: Future Apple Killer or a Sell?

It’ll be 10 years in December since Lenovo (LNVGY) proudly announced a game-changing, $1.75 billion takeover of IBM’s personal computer unit and catapulted into the big leagues of the global consumer electronics sector.

smartphone market share, Lenovo and Motorola
Source: Lenovo

Today, the Chinese company ranks near the top of the league and is itching for more growth. Last month, it bought Motorola Mobility from Google (GOOG) for $2.9 billion. And it has nearly closed a $2.1 billion deal for an IBM (IBM) server division.

China’s state media recently hailed Lenovo as a bigger threat to Apple (AAPL) in the tablet computer and smartphone businesses than Samsung (SSNLF) – even a potential Apple-killer.

Nice Run for Lenovo Stock

Stock investors, who hold about 60% of Lenovo (Chinese private equity and Lenovo Chairman and CEO Yang Yuanqing own the rest), have seen the company’s over-the-counter and Hong Kong shares gain about 28% over the past year.

So why are analysts such as Warren Lau at Maybank Kim Eng Research in Hong Kong rating Lenovo a “sell?” The simple answer is that the company’s ongoing expansion and quest for gadget-market dominance appears to be rooted in raw ambition rather than common sense.

Lenovo is already the world’s biggest PC maker and fourth-largest manufacturer of tablet computers. It recently tied for fourth place with LG in worldwide smartphone sales. It is likely to place higher soon, at least in volume terms, thanks to the deal for Motorola’s smartphone business.

And let’s not forget the server market. Lenovo is poised to become a leading global supplier of computer servers by juicing its own business with its purchase of IBM’s x86 division. The deal closed in most major markets last month, according to the company.

Why is Wall Street So Negative?

In a recent report, Lau said he expects “unfavorable results” tied to the Motorola and IBM server takeovers, given that the deals include about 10,000 additional workers for Lenovo’s payroll in developed countries, as well as “intangible” expenses and additional taxes. He predicted Lenovo for all-year fiscal 2015 would post its first year-on-year decline in earnings per share since the 2008 global financial crisis, with EPS falling as much as 30%.

Lenovo recently reported an EPS of $2.52 for its fiscal 2015 second-quarter. That represented a year-over-year 19% increase in net profit, to $262 million, but it was below analyst expectations.

Another looming threat to Lenovo is cutthroat competition for smartphone sales in China. In addition to Apple and Samsung, the company has to contend on its home turf with Chinese rivals Huawei and Xiaomi.

Lenovo has been focusing on low-priced phones to drive sales. The research firm International Data Corp. said “sub-$100” smartphones made for emerging-market countries helped Lenovo’s non-China shipments jump 9% in the third quarter 2014, year-on-year.

Back in 2008, when Lenovo controlled only 7% of the global PC business and didn’t even make tablets, the company reported losing money as well as market share. But competitors fared worse during the financial crisis. And the next year, Lenovo bounced back in part by cutting 11% of its workforce.

CEO is Upbeat

Lenovo’s Yang has in recent weeks told Chinese media that his company in the coming year will grab a larger share of the global market for PCs even as the market shrinks. He also predicted the company has a big future in making computing products for the so-called Internet of Things.

Speaking of the overall industry, Yang said “the high growth period has passed, but there is still considerable scale.” And in a press release announcing the closing of the Motorola deal, he stressed that Lenovo “has a clear strategy (and) great global scale.”

These statements contrast pretty sharply with some analyst commentary. For example, Lau said he learned from recent discussions with Lenovo that the company is forecasting fiscal third-quarter sales, inclusive of the Motorola and IBM server businesses, of no more than $14 billion, some $1.4 billion below what Lau’s firm had forecast.

“We believe the shortfall could come from the smartphone competition in China, stalled momentum at Moto (Motorola) smartphone as well as lighter-than-expected sales from the (IBM) x86 server” business, he wrote, under the report headline “near-term outlook challenging.”

Investors weighing the value of stock in Lenovo against other consumer electronics companies might want to compare Yang’s comments with bleaker assessments coming from analysts.  Once you do, you’ll find predictions in the Chinese media that Lenovo will be an Apple killer a pretty big reach.

Article printed from InvestorPlace Media,

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