Yahoo Finance Lenovo’s Saudi Alliance Boosts Appeal of Cheap AI-Related Stock
(Bloomberg) -- Lenovo Group Ltd. shares may continue to outperform peers as bargain valuations and growth potential in burgeoning markets lure investors to the Chinese computer maker.
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The stock is the best performer on Hong Kong’s benchmark Hang Seng Index this month, but it remains cheap with a forward earnings that trails global rivals including Dell Technologies Inc.
New PCs that tap into consumer demand to utilize artificial intelligence are seen lifting sales while analysts look for a rebound in markets for its more traditional products. A tie-up with Saudi Arabia’s sovereign wealth fund announced this week is expected to boost Lenovo’s presence and profits in the Middle East and Africa.
“Lenovo’s fundamental outlook is improving with the PC market recovering, and incremental demand for PCs and servers driven by AI,” said Vey-Sern Ling, a managing director at Union Bancaire Privee. “The new alliance with the Saudis will help the company enter the Middle East market when geopolitical tensions are making US and EU markets less accessible.”
The stock’s 29% gain in May makes it the third-best performer on a Bloomberg Intelligence index of computer hardware and storage firms, behind HP Inc. and Dell. Lenovo’s share price touched a nine-year high Monday though it has since lost some momentum. Dell’s disappointing AI server sales after Thursday’s close may take some steam out of the sector’s recent rally.
While the deal to sell $2 billion in convertible bonds to an arm of the Saudi Public Investment Fund has raised short-term concerns of potential dilution for Lenovo, the timing is opportune as it coincides with China President Xi Jinping’s call for more financial and technology cooperation with Arab nations.
The plan should be mutually beneficial, according to Bloomberg Intellignce analyst Steven Tseng. “Saudi gets to have the global No. 1 PC maker set up manufacturing capacity for PCs/servers and R&D centers in the country, while Lenovo secures a substantial capital injection and a strategic investor,” he said.
Management expects the company’s annual revenue growth in the Middle East and Africa to accelerate to the high double digits with help from the tie-up, compared with 11% last year, according to UOB Kay Hian Holdings Ltd. “Exploration of a new major region can also help hedge against US-China tension,” analyst Johnny Yum wrote in a report.
Analysts are overwhelmingly positive on Lenovo, with 27 buy ratings against three holds and no sells. Goldman Sachs Group Inc. raised its price target on the stock earlier this week to HK$13.98, one of the street’s highest, saying AI PCs will help boost the industry’s average selling prices and gross margins.
Options traders are upbeat on the stock as well, with the volatility skew indicating increased demand for bullish contracts on Lenovo compared with a week ago, Bloomberg data shows. Still, the shares remain cheap at 13 estimated earnings for the next 12 months, compared with 21 times for Dell.
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