Lenovo’s Saudi Alliance Boosts Appeal of Cheap AI-Related Stock

Lenovo Group Ltd. is expected to maintain its outperformance compared to its peers due to its attractive valuations and growth potential in emerging markets. Despite being the top performer on Hong Kong’s Hang Seng Index this month, the stock is still considered cheap in comparison to global competitors such as Dell Technologies Inc. The company’s sales are expected to be boosted by the introduction of new PCs that incorporate artificial intelligence, while analysts anticipate a rebound in demand for its traditional products. Furthermore, the recent partnership with Saudi Arabia’s sovereign wealth fund is anticipated to enhance Lenovo’s presence and profitability in the Middle East and Africa.
According to Vey-Sern Ling, a managing director at Union Bancaire Privee, Lenovo’s outlook is improving due to the recovery of the PC market and increasing demand for PCs and servers driven by AI. The recent alliance with the Saudis will also help Lenovo penetrate the Middle East market, especially at a time when geopolitical tensions are making the US and EU markets less accessible.

Lenovo’s stock performance has been impressive, with a 29% gain in May, making it the third-best performer on Bloomberg Intelligence’s index of computer hardware and storage firms, after HP Inc. and Dell. Although the share price reached a nine-year high on Monday, it has since lost some momentum. Additionally, Dell’s disappointing AI server sales could potentially dampen the recent rally in the sector.
Lenovo’s recent deal to sell $2 billion in convertible bonds to a subsidiary of the Saudi Public Investment Fund has sparked concerns about potential dilution in the short term. However, the timing of the deal is advantageous as it aligns with China President Xi Jinping’s push for increased financial and technology cooperation with Arab nations.

This deal is expected to be mutually beneficial for both parties involved. Bloomberg Intelligence analyst, Steven Tseng, suggests that Saudi Arabia will benefit from having the global leader in PCs establish manufacturing capacity and R&D centers in the country. On the other hand, Lenovo will receive a significant capital injection and gain a strategic investor.

Lenovo’s management anticipates that the partnership will accelerate the company’s annual revenue growth in the Middle East and Africa to high double digits, compared to the 11% growth seen last year. This collaboration will also serve as a means for Lenovo to diversify its operations and reduce its exposure to the ongoing tensions between the United States and China.

Overall, this deal presents an opportunity for Lenovo to expand its presence in the Middle East and Africa, while simultaneously securing crucial financial support from a strategic investor.
Lenovo has received strong endorsement from analysts, with 27 buy ratings, three holds, and no sells. Goldman Sachs Group Inc. recently increased its price target for the stock to HK$13.98, one of the highest on Wall Street. The investment bank believes that the introduction of AI PCs will contribute to higher average selling prices and gross margins in the industry.

Furthermore, options traders have also expressed optimism for Lenovo. According to Bloomberg data, the volatility skew indicates a greater demand for bullish contracts compared to the previous week. Despite this positive sentiment, Lenovo’s shares are still considered undervalued, with a price-to-earnings ratio of 13 for the next 12 months, in comparison to Dell’s ratio of 21.