Could New Smartphones Be a Catalyst for Lenovo Stock?
Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) might be selling fewer smartphones, but its earnings are rising. Lenovo stock lost almost a third of its value as of last May. Analysts have been pessimistic about earnings because of weak sales of personal computers. That’s important, because Lenovo is the world’s largest computer manufacturer.
But starting in July, Lenovo stock has started to rise again—despite some stumbles. Has the company reached bottom and started a recovery? Certainly, Lenovo stock is “cheap,” in the sense that it’s trading at 7-8 times forward earnings. (Source: “Lenovo Shares Have Plunged by More Than a Third So Far This Year,” Fortune, May 12, 2016.) The problem is that Lenovo has also faced obstacles in the smartphone business, which the company was building in order to hedge against the lower PC sales. (Source: Ibid.)
You might ask yourself, “Lenovo phones? Who’s ever heard of them? No wonder Lenovo stock is down.” Well, as it happens, Lenovo’s mobile phones are actually Motorola. Lenovo bought the Motorola brand from Google, now Alphabet Inc (NASDAQ:GOOG), in 2014.
The Next Big Thing for Lenovo
Remember Motorola? It was one of the companies that pioneered the mobile phone. Its “StarTAC” flip phone of the late 1990s was all the rage—not to mention that the first cell phone ever was the Motorola “DynaTAC 8000x,” released in mobile telephony’s equivalent of the “Bronze Age”: 1983. But Lenovo has not yet been able to profit from this prestigious heritage. Still, the company has managed to show good earnings.
Indeed, its net earnings rose by 64% year-on-year to $173.0 million in the latest quarter. Analysts welcomed the numbers, also because operating profit of $245.0 million was much higher than expected. But a good 49% of the earnings derived from the sale of a property in China. Lenovo plans to reinvest the proceeds into its core business.
Presumably, Lenovo will now consider smartphones as part of its core business. Despite the difficulties that also plague this sector, Lenovo needs to move beyond the personal computer (PC). The market for PCs is dropping worldwide, because of the various other options that consumers have these days, from tablets to all-in-one desktops and “Chromebooks”—for starters. Then there is the continued rivalry between PCs and Apple products.
Read More: “And the Loser in the Smartphone Battle Is…”
But that was already old news last year. Lenovo must improve its smartphone business to grow and deliver gains that translate to a higher market valuation. Lenovo became the world’s No. 1 smartphone maker, beating out HP. This year, sales dropped seven percent. But few were surprised. As for smartphones, on the other hand, the problem is bigger because Lenovo stock has not yet capitalized on the Motorola acquisition for $2.9 billion.
Still, the “failure to launch” smartphones at Lenovo might not be a failure at all. It may just be that the market expected too much, too soon. This explanation gains further traction when you observe that Lenovo had to compete against the likes of established Chinese brands Huawei, Xiaomi, and another new player, OPPO. By the way, these competing brands happen to be in the top five in global sales. (Source: “Gartner Says Five of Top 10 Worldwide Mobile Phone Vendors Increased Sales in Second Quarter of 2016,” Gartner, August.19, 2016.)
Lenovo’s plan, which could be a major catalyst, is to enhance the brand as a major player in the smartphone market with its forthcoming and latest iteration of the “Moto” handset. Many consumers, especially in the crucial U.S. market, have not had the chance to learn about the “Moto Z.” And that’s too bad, because, by all accounts, this is a winner. (Source: “Leaked photos just revealed Lenovo’s next-gen Moto Z smartphone,” BGR, August.19, 2016.)
Only Verizon offers the Moto Z, but it seems that, at its highly competitive price-point, the next generation of Moto Z has few if any rivals in the “Android” space. Looking ahead, therefore, Lenovo will shift attention to high-growth segments, relying on industry consolidation to resume growth. What this means for its ever-more-important smartphone business is that Lenovo will try to offer the best phone for the money.
The Bottom Line on Lenovo Stock
This will help its market penetration, especially in such regions as the Middle East and Africa—as well as Europe and the U.S.—where some of the other Android and “iOS” products are too expensive. It also means that after successive losses, Lenovo stock should be gearing up for a bullish rally in the next few months.
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