Lenovo Earnings: While Sluggish Server Demand Disappoints the Market, PC Recovery Is In Line

Although the weaker-than-expected loss at the server business disappointed the market, we believe Lenovo’s fundamentals are not as bad as the numbers look, and the PC business is in the recovery phase from the inventory adjustment, as we had expected. While we lower our operating income forecasts for fiscal 2023 (ending March 2024) and fiscal 2024 due to sluggish server demand, slightly lower margin for PCs, and higher financing costs due to higher interest rates, we raise our PC shipment assumptions from late 2024 onward as we are more confident that replacement demand will pick up. As a result, we maintain no-moat Lenovo’s fair value estimate of HKD 10.50 and believe its shares are undervalued.