The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.



Lenovo Stock Analysis

Summary:

Lenovo needs a resurgent phone business to offset the continuing decline in PC sales.

The new modular Moto Z and the Project Tango-flavored Lenovo Phab2 Pro are very promising new handsets that could help Lenovo recover what it lost in smartphone market share.

The $100 Vibe K5 will help Lenovo compete better with Xiaomi and Huawei’s entry-level Android phones.

Phone accessories like the Motorola Vervelife line of headphones and the MotoMods add-ons can increase Lenovo’s monetization efforts on mobile.

Lenovo is a beaten down stocks that has very positive long-term algorithmic forecast scores.

I can easily explain why Lenovo (LNVGY) has posted a terrible -37.9% YTD performance in the stock market this year. Being the top vendor of personal computers, Lenovo is very vulnerable to the still declining PC industry. IDC issued another warning that global PC shipments will decline 7.3% this year. This persistent negative outlook for PC products (which generate the most revenue for Lenovo) will likely depress the stock price.

What’s more bothering is that Lenovo’ home market of China is also experiencing an economic slowdown. Study the chart below, Lenovo’s revenue from China has declined over the last three quarters.

Low consumer interest in buying new computers are also apparent in the stagnating revenue stream from Asia. On this note, I propose that Lenovo badly needs to generate more revenue outside of its personal computer comfort zone. A renewed focus on smartphones could help LNVGY regain the respect of investors. Unlike the PC market, the smartphone industry is still predicted to grow this year.

IDC’s latest June forecast revealed that Android phone shipments will still post a healthy 6% CAGR until 2020. Lenovo is still among the top vendors of smartphones. Lenovo could easily offset the lingering weakness in its PC business by fortifying its Android smartphone business.

Moto Z and Phab2 Pro Can Reignite Lenovo’s Smartphone Strategy

Lenovo’s previous mishandling of its Motorola phone subsidiary has led to it losing its top 5 ranking in smartphones. Lenovo’s management admitted last month that, after becoming the no.3 phone vendor when it bought Motorola Mobility in 2014, it failed to maintain its momentum on smartphones.

As a result of Lenovo’s blunder, the company has dropped to being just the no.9 global player in smartphones. Other Chinese firms like Oppo, ZTE, Vivo, and Xiaomi sold more Android phones than Lenovo during the first quarter of this year. Lenovo’s failure to properly capitalize on the world-famous Moto and Motorola brands meant it is unlikely to catch up with Samsung (SSNLF) and Apple (AAPL).

Competing with Samsung Android phones is out of the question. Lenovo will just have to focus on beating its Chinese rivals and hopefully get back its top 3 ranking within the next 12 months. The new flagship Moto Z Android smartphone could help Lenovo penetrate deeper into the high-end phone market currently dominated by Samsung and Apple.

Like the LG G5, Lenovo’s Moto Z and Moto Z Force tout a modular (or modifiable) design. The Moto Z handsets look like other high-end Android phones but they can be customized or personalized by adding snap-on accessories. Lenovo’s MotoMods brand of pricey add-on products can transform a Moto Z/Moto Z Force into an instant projector or a JBL speaker-powered mobile sound system.

The screenshot below should illustrate Lenovo’s new approach to selling Android phones. Instead of merely relying on selling high-end handsets, Lenovo now wants to also generate revenue by selling its own in-house accessories for the Moto Z.

(Source: Motorola USA)

The Insta-Share Projector Moto Mod for the Moto Z will cost $299. Business users who will buy the Moto Z will spend more money for this Insta-Share Projector add-on product. Instead of lugging around a laptop and a projector to do PowerPoint presentations, an employee can instead use the pocket-sized Moto Z.

Another handset that could help Lenovo win back its market share is the Project Tango-powered Phab2 Pro. Alphabet (GOOG) and Lenovo first announced their Project Tango handset during the CES 2016 event. The Phab2 Pro is now the first consumer Android phone that uses the Project Tango platform. It is a handset with Augmented Reality cameras.

Augmented Reality-compatible handsets has commercial potential among business users and educators. As far as I know there’s no other Project Tango-compatible Android phone in the market today. The Phab2 Pro is going to corner the market for Augmented Reality phones.

(Source: Google)

Lenovo Can Also Compete In The Entry-Level Phone Industry

The Moto Z and Phab2 Pro can help Lenovo regain its footing in the mid-range and high-end phone sectors. However, Lenovo knows that its comeback on smartphones requires it to compete with the entry-level phones of Oppo, Vivo, Huawei, and Xiaomi. The new $100 Vibe K5 is the equalizer to all the cheap phones of Lenovo’s rivals.

There’s not going to be any significant margins on $100 phones but Lenovo has no choice but to engage in this race-to-the-bottom reality when selling Android devices. Without a presence in entry-level Android phones, Lenovo will get stuck behind its Chinese rivals.

Lenovo will have to eventually imitate the strategy of Huawei, Oppo, and Xiaomi. Those firms sells dirt-cheap Android phones and still make money because they operate some of the top app stores in China. Xiaomi owns the second biggest store in China.

(Source: Newzoo)

Lenovo needs its own Android app store as a way to offset the almost-zero margins in selling entry-level phones.

Final Thoughts

I recommend that brave long-term investors to consider adding LNVGY to their portfolios. This leader in PC products has enough money and global network to help it become a top 3 vendor of smartphones. A dual approach of selling both high-end and entry-level Android phones is a necessary evil for any Android device vendor. I see Lenovo’s strong relationship with global PC retailers as a key advantage over Huawei, Oppo, and Xiaomi.

The network of retailers that sells Lenovo laptops and computers could become potent distribution partners for the Moto Z and Vibe K5. Coming up with a Thinkpad plus Moto Z bundled sales promotion is one way that Lenovo can push PC products through the Moto brand.

A recovery in PC sales and more robust Lenovo performance in Android phones could help LNVGY’s price. My buy rating for Lenovo is fortified by the very strong one-year algorithmic forecast score from I Know First. As per I Know First, the one year forecast for LNVGY has a very high 207.70 buy signal and 0.59 predictability score.