Lenovo: More Than Just PCs

Lenovo is a global tech company best known for its laptops and PCs, but it’s becoming much more than that. Today, it also makes smartphones, builds data centers, and offers IT services to businesses around the world. The company is investing heavily in AI and cloud technology, aiming to grow beyond hardware and build more stable, long-term revenue. The question is: Should Lenovo be part of your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Lenovo at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Lenovo, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Lenovo is a global technology company with dual headquarters in Beijing and Morrisville, North Carolina, and operational headquarters in Hong Kong. Founded in 1984, it operates in over 180 markets and develops, manufactures, and markets a broad range of technology products and services including personal computers, smartphones, servers, storage systems, and IT solutions. Its operations are organized into three business segments. The Intelligent Devices Group focuses on PCs, tablets, smartphones, and smart devices. This segment includes some of Lenovo’s most recognized brands such as ThinkPad for business users, IdeaPad for consumers, Yoga for convertible devices, Legion for gaming, and Motorola for smartphones. The Infrastructure Solutions Group provides enterprise customers with servers, storage, edge computing systems, high-performance computing, and software-defined infrastructure. The Solutions and Services Group offers consulting, managed services, support, cloud solutions, and cybersecurity. This segment reflects Lenovo’s strategic shift toward a higher-margin, recurring revenue model that complements its traditional hardware business. Lenovo is in the middle of a long-term shift in how it does business. Instead of focusing mainly on selling hardware like computers and phones, the company is moving toward offering more services and complete solutions for businesses. Artificial intelligence is a big part of this change. Lenovo is working to build smart devices and infrastructure that can run AI smoothly, while also helping customers in different industries use AI in ways that fit their specific needs. At the same time, Lenovo is using its global size to develop shared strategies across the company, while making sure each region can adapt those plans to local markets. This mix of global resources and local flexibility helps Lenovo stay competitive and responsive. What gives Lenovo a competitive edge is the way it runs its global operations. Unlike many competitors, Lenovo controls the entire process—from designing products and sourcing parts to manufacturing and delivering services. This tightly connected setup makes it easier for the company to respond quickly to changes in demand or supply chain disruptions. A big part of this advantage comes from its unique ODM+ model, which combines its own factories with trusted partners across more than 30 sites in 11 countries. This gives Lenovo the flexibility to shift production between regions, deliver products faster, and keep costs low. At the same time, it maintains strong access to China’s highly efficient manufacturing base. This mix of control, scale, and flexibility forms a moat that protects Lenovo from competitors who can't match its global reach or operational adaptability.

Management

Yang Yuanqing serves as the Chairman and CEO of Lenovo, roles he has held since 2005 and 2009 respectively, after joining the company’s leadership team as an executive director in 1997. With more than three decades of experience in the information and communications technology industry, Yang Yuanqing has played a central role in transforming Lenovo from a regional PC maker into a global technology company with a broad portfolio spanning personal devices, data center infrastructure, and digital services. Under Yang Yuanqing’s leadership, Lenovo expanded beyond its core PC business into smartphones, servers, storage systems, and enterprise solutions. He led the company through several major acquisitions, including the purchase of IBM’s PC division in 2005 and Motorola Mobility in 2014. These strategic moves helped Lenovo broaden its technology base, strengthen its presence in global markets, and gain access to well-known international brands and advanced R&D capabilities. Yang Yuanqing has also been the architect of Lenovo’s long-term strategy known as Intelligent Transformation. This approach involves shifting the company from a hardware-focused business model to one that offers integrated solutions and services built around artificial intelligence and digital infrastructure. It reflects his vision to position Lenovo as a key enabler of intelligent technologies across industries. In addition to his work at Lenovo, Yang Yuanqing serves as an independent director of Baidu. He previously served as an independent director of Taikang Insurance Group. He holds a Master’s degree in Computer Science from the University of Science and Technology of China and a Bachelor’s degree in Computer Science and Engineering from Shanghai Jiao Tong University. Yang Yuanqing is known for his global perspective and long-term focus, with an emphasis on operational excellence, adaptability, and investment in future growth areas such as AI and services. Given his track record and strategic mindset, I believe he is the right person to lead Lenovo through its next phase of transformation.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. . Lenovo's ROIC has declined since its peak in fiscal year 2022, and while it’s now at its lowest level since 2020, it’s still above the required 10%, which is generally considered a healthy level. That means the company is still generating returns above its cost of capital and creating value. The decline doesn’t necessarily signal a problem. During the years from 2016 to 2022, Lenovo benefited from strong demand for PCs, especially during the pandemic, and improved margins. What you’re seeing now is likely a return to more normal conditions as the surge in device sales has faded and the company shifts toward longer-term growth areas. Part of the reason for the recent dip is Lenovo’s move into new areas like services, infrastructure, and AI. These businesses usually require upfront investment and take time to scale, so they can temporarily weigh on profitability and returns, even if they are better for the company over time. External factors like weaker enterprise spending, tariffs, and supply chain pressures have also played a role. In that context, the drop in ROIC seems more like a short-term adjustment than a long-term concern. It’s something to watch, but not something to worry too much about yet. If Lenovo’s newer business lines begin to contribute more meaningfully, there’s a good chance that ROIC could stabilize or improve again.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Lenovo has grown its equity in most years over the past decade, with the exception of fiscal years 2019, 2020, and 2021. Despite those dips, equity has since rebounded and reached its highest level in fiscal year 2025. There are a few likely reasons for this pattern. The decline in equity during those three years likely reflects a combination of factors. Lenovo was investing heavily in transforming its business, expanding into data centers, services, and AI, while also dealing with external pressures like trade tensions, tariffs, and pandemic-related disruptions. These pressures may have reduced profitability or led to higher costs, which in turn limited retained earnings and equity growth. Since then, Lenovo has benefited from a post-pandemic recovery in enterprise spending, improved cost management, and growth in higher-margin areas like services. As earnings improved and the company retained more of those profits, equity increased. The fact that equity reached its highest level in fiscal year 2025 suggests the company has returned to a more stable and profitable footing, with stronger cash generation supporting long-term capital growth.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Lenovo’s free cash flow performance over the past decade has been mixed, reflecting the capital-intensive nature of its business and the cyclical dynamics of the tech hardware sector. It recorded negative free cash flow in fiscal years 2016 and 2018, reached a record high in fiscal year 2022, and then saw a significant decline by fiscal year 2025. This pattern isn't unusual for a company like Lenovo, but it does raise some important points about its underlying business model and investment cycle. The negative free cash flow in 2016 and 2018 was mainly the result of weaker profitability and increased demands on cash tied up in day-to-day operations. During those years, Lenovo faced pressure on its PC margins and was expanding into the enterprise and mobile markets, which required building up inventory and extending credit to customers. At the same time, the company was going through restructuring efforts after recent acquisitions, which added to costs. All of this meant that more cash was being used to run the business, leaving less available at the end of the year. The sharp increase in free cash flow happened in fiscal year 2021, during a time when demand for PCs and tablets surged due to remote work and online learning during the pandemic. That boost in demand helped Lenovo grow its revenue quickly and improve its profits. The company also managed its operations more efficiently, using less cash to support inventory and customer payments. Free cash flow rose even higher in fiscal year 2022, reaching a record level. However, this strong performance was driven by unusual conditions during the pandemic and was not something that could be expected to continue every year. By fiscal year 2025, free cash flow had declined significantly. This happened as demand for devices slowed after the pandemic and Lenovo put more resources into growing areas like services, AI, and infrastructure. At the same time, the company used more cash to support its daily operations, for example, by holding more inventory or giving customers longer payment terms. Even though the business remained profitable, these changes reduced the amount of cash left over at the end of the year. In general, Lenovo’s relatively low free cash flow margins reflect the nature of its core business. The company operates in a low-margin, high-volume industry that depends on keeping large amounts of inventory and managing a complex global supply chain. While Lenovo is aiming to grow the share of high-margin recurring revenue from services, the hardware side of the business still makes up the majority of operations and puts a limit on how much cash the company can consistently generate. This doesn’t mean the business is weak, but it does show how important scale, cost efficiency, and disciplined spending are for maintaining long-term financial strength. Lenovo's approach to capital allocation has been relatively balanced, with a focus on reinvesting in growth areas like services and infrastructure while also returning cash to shareholders through regular dividend payments. The free cash flow yield is at its lowest level since 2018, mainly due to the drop in free cash flow in fiscal year 2025. This doesn’t necessarily mean the shares are trading at a premium valuation, but we will revisit that question later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within three years, calculated by dividing total long-term debt by earnings. Upon analyzing Lenovo’s financials, it is clear that the company currently has 3,28 years of earnings in debt, which is slightly above the three-year threshold. While this is something to keep an eye on, it does not appear to be a major concern at this stage. enovo continues to generate solid profits, has maintained healthy interest coverage, and has access to global capital markets. The company is also actively investing in future growth rather than relying on debt to cover operating needs. Taken together, these factors suggest that while debt levels are worth monitoring, they remain manageable in the context of Lenovo’s overall financial position and strategy.

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Risks

Macroeconomic factors are a risk for Lenovo. As a global company that sells both consumer electronics and enterprise solutions, Lenovo’s performance is closely tied to the health of the broader economy. When economic growth slows, it often leads to weaker demand from both consumers and businesses. Individuals may delay upgrading devices like laptops or smartphones, while companies may cut back or postpone investments in IT infrastructure and services. This sensitivity to the economic cycle means that fluctuations in GDP, employment, or business confidence can directly impact Lenovo’s sales and earnings. In addition to economic cycles, Lenovo is heavily exposed to geopolitical and regulatory risks due to the global nature of its operations. The company sources components, manufactures products, and sells to customers across multiple regions, making it vulnerable to shifts in trade policy or international relations. For example, when a 25% tariff was suddenly introduced, Lenovo did not have time to adjust its operations, resulting in a direct and material hit to its quarterly performance. This kind of policy shock can not only raise costs but also force abrupt changes in supply chain planning or manufacturing locations. Trade restrictions, export controls, and data localization rules can further complicate operations. These measures may limit Lenovo’s ability to access certain markets, require adjustments to how data is stored and processed, or introduce compliance costs that eat into margins. While Lenovo’s scale, geographic diversification, and operational flexibility provide some protection, the nature of these external risks means they can’t be fully mitigated. As a result, macroeconomic and geopolitical uncertainty remains a structural challenge for the company, affecting not just quarterly performance but also longer-term planning and execution.

Laws and regulations are a significant risk for Lenovo, especially given its scale, international footprint, and identity as a Chinese-headquartered company operating in sensitive areas like data, infrastructure, and artificial intelligence. Lenovo must comply with a wide range of legal and regulatory frameworks across multiple jurisdictions, many of which are becoming more complex, fragmented, and politically influenced. Being a Chinese company, Lenovo operates under increased scrutiny in some Western markets, particularly the United States and parts of Europe, where concerns around cybersecurity, data sovereignty, and national security have led to stricter rules and heightened enforcement. In recent years, we have seen how quickly governments can introduce new restrictions, whether through tariffs, export controls, bans on specific technologies, or tightened regulations on data transfer and AI. This unpredictability increases the risk of Lenovo facing sudden policy changes that could disrupt operations or restrict access to key markets. Beyond geopolitical considerations, Lenovo must also manage a wide range of evolving legal requirements. These include anti-bribery and anti-corruption laws, product safety and certification standards, antitrust and competition rules, and increasingly detailed ESG and disclosure regulations. Non-compliance, even unintentional, can result in financial penalties, reputational harm, or the loss of government or enterprise customers. Privacy and data protection is another key area of risk, particularly as Lenovo offers connected devices and services that collect and process user and enterprise data. Regulations like the EU’s GDPR or China's PIPL impose strict standards on how data is handled, and violations can carry significant consequences.

Competition is a key risk for Lenovo because the company operates in one of the most dynamic and fast-moving industries in the world. The markets for personal computers, smartphones, infrastructure solutions, and IT services are all highly competitive, with rapid technological advances and constantly evolving customer needs. In this environment, companies must continually innovate, maintain efficient operations, and respond quickly to shifting trends, otherwise, they risk falling behind. Lenovo faces intense competition from both global giants and emerging players across all of its business segments. In PCs and laptops, it competes directly with HP, Dell, Apple, and Asus, all of which offer strong brand recognition, innovation pipelines, and large customer bases. In smartphones, the competition is even more crowded, with Apple, Samsung, Xiaomi, and other regional players competing aggressively on both price and features. Meanwhile, in the data center and infrastructure space, Lenovo is up against well-established players like Dell Technologies, Hewlett Packard Enterprise, and Cisco, as well as cloud giants like Amazon Web Services and Microsoft Azure, which increasingly bundle hardware with broader enterprise solutions. On top of that, competition is not limited to products alone, it extends to pricing, distribution, service models, and customer experience. Any lag in innovation, failure to meet changing customer expectations, or inability to offer competitive pricing could lead to a loss of market share. The risk is particularly high in commoditized segments like consumer PCs, where pricing pressure is constant, and margins are already thin.

Reasons to invest

Devices are a compelling reason to invest in Lenovo, as they remain at the core of the company’s competitive advantage, market leadership, and future growth potential. Lenovo continues to dominate the global PC market, expanding its market share across both consumer and commercial segments. Lenovo not only holds the number one position in global PC shipments, but has also widened its lead over competitors while maintaining industry-leading profitability. Innovation plays a key role in this leadership—Lenovo has introduced products with cutting-edge form factors like foldable and rollable designs, and has taken an early lead in the emerging AI PC category. These AI PCs already make up a growing portion of Lenovo's notebook shipments and have positioned the company as the top Windows AI PC vendor globally outside of China. AI PCs are expected to reenergize demand for personal computing devices over the next few years, as more users adopt systems that can run intelligent applications locally with enhanced performance, battery life, and personalized features. Lenovo’s device strategy also goes beyond PCs. The smartphone business, driven by the Motorola brand, has experienced strong growth and rising profitability, reaching its highest revenue level since the acquisition of Motorola Mobility. Premium models like the foldable Razr and Edge series have gained traction, helping Lenovo climb to the fourth-largest smartphone vendor outside of China. The company has also strengthened its presence in fast-growing regions such as Asia Pacific and EMEA, creating a more balanced global footprint. Tablets are another bright spot, with double-digit growth supported by enterprise demand and education use cases.

Infrastructure solutions are a strong reason to invest in Lenovo, as the company’s Infrastructure Solutions Group (ISG) is now one of its fastest-growing and most promising segments. Over the past year, ISG reached record-high revenue and returned to profitability in the second half of the year. This growth came from two key areas: cloud service providers and traditional enterprise customers, including small and medium-sized businesses. Both segments are seeing increasing demand for data center and AI infrastructure, and Lenovo is well positioned to meet that demand. A big part of this success comes from Lenovo’s unique ODM+ model. This approach allows Lenovo to offer tailored, large-scale solutions to cloud providers while keeping costs under control. At the same time, Lenovo is bringing many of these innovations, such as advanced cooling systems and AI-ready servers, into the enterprise market, where customers are upgrading aging systems and preparing for AI workloads. One standout area is Lenovo’s leadership in liquid cooling technology through its Neptune system. This is becoming more important as AI applications require more power and generate more heat. Lenovo’s Neptune servers help make data centers more efficient and are seeing strong adoption, with sales growing sharply over the past year. This gives Lenovo an edge as more companies look to build infrastructure that supports AI. ISG is not just growing in size, it is also becoming more profitable. The company is simplifying its product offerings, improving its sales channels, and working closely with ecosystem partners to build smarter, more complete solutions. With AI adoption growing across industries, the demand for powerful and efficient infrastructure is expected to increase. Lenovo’s position in this space, backed by strong technology and a scalable business model, makes infrastructure solutions a key long-term growth driver.

Service solutions are an important reason to invest in Lenovo because they are growing quickly, highly profitable, and increasingly central to the company’s future. Lenovo’s Solutions and Services Group (SSG) has delivered strong results for four years in a row, with double-digit growth in both revenue and profit. It also earns the highest margins of any Lenovo business unit, which means it adds stable and high-quality income to the company overall. SSG includes support services, managed services, and project-based solutions. Support services grow steadily alongside Lenovo’s hardware business, while managed services, like Device-as-a-Service and Hybrid Cloud solutions, are growing even faster. These offerings allow companies to rent hardware and services as a package, giving them flexibility while creating longer and more predictable revenue for Lenovo. What makes SSG especially exciting is its growing focus on AI. Lenovo has launched new AI-powered services that help businesses use AI more effectively, from building the right infrastructure to choosing the right data and models. These solutions are already gaining traction with customers in different industries, and Lenovo expects this demand to increase in the coming years. SSG also benefits from Lenovo’s global scale and deep knowledge of hardware, which helps it deliver reliable, cost-effective services across many markets. As more companies look for help with digital transformation and AI adoption, Lenovo’s services business is well positioned to meet those needs. With strong growth, high profit margins, and increasing demand, service solutions are a key part of Lenovo’s long-term investment story.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,83, which is from fiscal year 2025. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 12,8% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 10, which is twice the growth rate. This decision is based on Lenovo's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be HKD 18,11. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Lenovo at a price of HDK 9,05 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 8.558, and capital expenditures were 5.186. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 3.630 in our calculations. The tax provision was 147. We have 12.405 outstanding shares. Hence, the calculation will be as follows: (8.558 – 3.630 + 147) / 12.405 x 10 = HKD 4,09 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Lenovo's Free Cash Flow Per Share at HKD 0,27 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is HKD 3,89.

Conclusion

I believe Lenovo is an intriguing company with capable management. Its moat stems from a combination of supply chain control, scale, and flexibility. The company has delivered a ROIC above 10% every year since fiscal 2019, and while it declined in fiscal 2025, it is expected to improve going forward. Free cash flow also dipped in fiscal 2025 due to shifting priorities but should recover. Macroeconomic conditions are a risk, as Lenovo depends on global consumer and enterprise spending, both of which tend to weaken during downturns. Its international footprint also exposes the company to geopolitical tensions, trade barriers, and sudden policy shifts that can disrupt operations, raise costs, and complicate long-term strategy. Regulatory risk is elevated due to Lenovo’s Chinese roots and its involvement in sensitive areas like data and AI, particularly in Western markets where scrutiny is increasing. Compliance challenges in areas such as data privacy, product safety, and AI governance add to the risk. Competitive pressure is intense across all segments, from PCs and smartphones to infrastructure and services, so Lenovo must continually innovate and deliver strong customer experiences to maintain its position. Devices remain a core strength, as Lenovo leads the global PC market and is taking early leadership in AI PCs, while its smartphone and tablet businesses are growing steadily, especially in premium segments and emerging markets. Infrastructure solutions also stand out, with strong growth in cloud and enterprise demand, a profitable turnaround, and differentiated technology such as liquid cooling and the ODM+ model. Service solutions are increasingly important as well, contributing high-margin, recurring revenue through managed services and AI-powered enterprise offerings. Despite all these strengths, I believe there are better investment opportunities elsewhere, so I will not be investing in Lenovo at this time.

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