The constant worry of the death of the personal computer business should no longer be considered as "imminent" -- it's already arrived. It was driven in the race between Dell (UNKNOWN:DELL.DL) and Hewlett-Packard (NYSE:HPQ) to see who can hemorrhage PC revenue faster. Absent from that contest was Lenovo (OTC: LNVGY), whose rapid growth amid an equally swift dying industry is nothing short of remarkable.
Despite this fact, the company can't get any love on Wall Street, at least not to the extent that other market leaders are discussed in the media. Granted, concerns about Lenovo's slim margins and that it might be vulnerable to the competition are valid reasons. However, after a recent quarter during which profits rose 34%, this stock looks very cheap.
Putting zombies to work in a solid report
As PCs are dying and being laid to rest by Dell and HP, they are being revived in Hong Kong and are put to work and helping Lenovo log its best quarter ever. For the period ending in December, Lenovo posted net income of $205 million, growing 34% year over year and beating estimates of $178.4 million. Revenue advanced 12% to almost $10 billion.
As great as that sounds, that the bulk of Lenovo's revenue still comes from personal computers, or close to 90%, serves as a major sticking point with investors. As it stands, Lenovo trails HP by the slimmest of margins in worldwide PC shipments. Nonetheless, being the leader of a perceived dying industry doesn't make investors feel any better. But Lenovo understands this.
How well can it diversify from morbidity?
The company has been working hard to diversify from its PC dependency and has begun to leverage its strength in new products such as smartphones and tablets. To that end, the company has taken a page out of Apple's (NASDAQ:AAPL) ecosystem model by looking to pivot off an excellent brand name to create a synergized distribution channel. That one-tenth of Lenovo's Q3 revenue arrived from mobile its mobile business means that so far the strategy has worked pretty well.
Just as with Apple, Lenovo's objectives are focused on emerging markets overseas -- and not just in China, where it already has a 36.7% share stronghold. The company has shown ample interest in areas such as Indonesia and Brazil -- going so far as to acquire CCE, Brazil's sixth-largest PC vendor. What's more, markets such as India and Russia, where Lenovo currently enjoys 17% and 12% market share, respectively, are still projected to grow.
However, the concern continues to be the competition. Unlike Apple, Lenovo doesn't yet enjoy what is considered a loyal fan base, especially not in emerging markets where the main selling feature is how cheap the device can be sold. Eve Jung, an analyst at Nomura Equity Research, agreed by recently stating:
It (Lenovo) will face challenges in the sector as companies like Acer and Asustek roll out cheaper tablet PC models to aggressively target markets, such as China, which is Lenovo's traditional stronghold.
As noted, this type of vulnerability has been one of the reasons investors have stayed away from the stock. However, the above issue referenced tablet PC threats. But with its healthy cash position, Lenovo has been able to buy into markets via acquisitions. CCE was a perfect example. Then again, and for obvious reasons, not many rivals were looking to invest to compete for this PC businesses, either. They don't think there's a future in it.
In that regard, fending off smartphones rivals won't come as easy. First and foremost, there's Apple, which has begun to encroach on the Chinese market. Granted, Apple is not expected to dominate. But it can't be ignored that Apple can launch a cheaper version of the iPhone if it really wants this market badly enough. Why wouldn't it?
However, it's not just about Apple. Lenovo has to compete on its own turf with two of the top five global smarphone players in ZTE and Huawei Technologies. In other words, though Lenovo is doing well now by taking these small steps into tablets and smartphones, the company still has a long way to go before it becomes the next Samsung. It needs to leap.
Then again, it doesn't have to be Samsung. Lenovo can just become the next owners of BlackBerry (NYSE:BB). Now would be the perfect time for a BlackBerry acquisition after the company launched its new BB10 phones to underwhelming reviews. Since the launch, shares of BlackBerry has lost as much as 33%, although the stock has made back some of these gains.
Although Lenovo has defused the BlackBerry acquisition rumors, the company nonetheless confirmed what was believed to true -- it's looking to buy somebody. Besides, not only would BlackBerry strengthen Lenovo's global mobile position, but Lenovo would then be able to compete against Google's (NASDAQ:GOOGL) Android OS by licensing out BB10 to hardware players, even to Samsung.
Besides, with BlackBerry's global standing and its prominence in China, Lenovo would have no problems selling its own branded phones on its home turf. To top it off, buying BlackBerry would also improve Lenovo's competitive position against Chinese rivals ZTE and Huawei. And while it was smart to downplay the rumor, this is a deal that makes too much sense for Lenovo to ignore.
The stock's too cheap to ignore
In the meantime, after 13 consecutive quarters of solid growth, Lenovo has earned some Street credibility. The stock can be worth at least $30 if Lenovo can produce 3% to 5% cash flow compound growth over the next decade. Although margins are slim today, it might not be for long as Lenovo continues to grow mobile market share. On that basis, it would be wise for investors to pay attention to this stock, especially since it's still carrying low peer valuation.
Fool contributor Richard Saintvilus owns shares of Apple. The Motley Fool recommends and owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.