Lenovo Earnings: PC Shipment Recovery and Improving Product Mix to Offset Weaker Server Shipments

After fine-tuning Lenovo’s earnings forecasts, we keep our HKD 12 fair value estimate and believe shares are undervalued. While the timing of our forecasts for the infrastructure solutions group, or ISG, segment’s return to profitability has been delayed by a year to fiscal March 2026—due to sluggish recovery in server shipments and deteriorating product mix—we raise our operating margin assumption for the intelligent device group, or IDG, segment as we believe the PC product mix will improve more than we had previously expected over the next two years. As a result, we lower our forecast for Lenovo’s fiscal March 2025 operating income by 8%, but the revision to fiscal March 2026 is limited. We believe the market underestimates the pickup in replacement demand and product mix improvement starting in late 2024. Lenovo’s share price is down more than 20% from its recent peak earlier this year, mainly on concerns about rising geopolitical risks. As North America accounts for about 20%-25% of Lenovo’s PC shipments, we believe the current share price implies Lenovo will substantially lose market share in the United States, which we think is overly pessimistic.