AI drives PC and server businesses, Morgan Stanley significantly raises Lenovo's target price by 65%

Author: Zhao Ying

Source: Hard AI

The AI wave is activating the PC upgrade cycle, and it is expected to accelerate in the second half of the year. Morgan Stanley believes that Lenovo will be the biggest beneficiary.

In its latest report on May 21, Morgan Stanley stated:

"Lenovo has always been an undervalued stock. We now see significant upside potential and have upgraded Lenovo's stock rating to 'Overweight', with the target price raised from HKD 9.10 to HKD 15, a substantial 65% increase."

It is worth mentioning that after Morgan Stanley's bullish call, Lenovo's Hong Kong stock price surged by 12% yesterday. Morgan Stanley predicts:

"Benefiting from the rapid growth of the AI PC and AI server markets, Lenovo's AI PC market penetration is expected to reach 64% in 2028, with notebook penetration reaching 85%. AI server orders will also increase significantly.

Revenue share is expected to increase from 2% in the 2024 fiscal year to 53% in the 2028 fiscal year. Orders for Lenovo's newly launched L40S series servers continue to grow, especially the H100/H200 AI servers, which are expected to bring in approximately $1.5-2 billion in orders over the next few quarters, driving at least 20% growth for Lenovo's ISG business in the 2025 fiscal year."

Regarding the reasons for being optimistic about Lenovo, Morgan Stanley pointed out that Lenovo has self-developed AI chips. The Lenovo LA3 chip is expected to improve performance by 18%. Additionally, Lenovo has the most comprehensive artificial intelligence features, including enhanced network security, audio/video quality enhancement, content generation, and the introduction of the personal assistant "Lenovo Xiaotian".

The AI PC Market Will "Take Off" in the Second Half of the Year

Morgan Stanley predicts that the market penetration of AI PCs will significantly increase starting from the second half of 2024:

"The market penetration of AI PCs is expected to reach 64% in 2028. If we only look at the penetration rate of notebooks, it will rise to around 85%, while the penetration rate in 2024 is estimated to be only 5%. Shipments of AIPC will increase from 4.6 million units in 2024 to 179 million units in 2028.

Furthermore, the prices and profit margins of AI PCs will also increase accordingly:

The average selling price (ASP) of AI PCs will start at $1000 and gradually expand to the $500 price range. AI PCs will drive up the ASP and profit per device for PC OEMs.

Morgan Stanley predicts that Lenovo will be the main beneficiary of this round of upgrade cycle:

According to IDC data, global notebook sales in 2023 were 59.1 million units, with Apple accounting for 31%, Lenovo for 18%, HP for 17%, Dell for 12%, Asus for 7%, and Acer for 3% Apart from Apple, Lenovo, HP, and Dell will all benefit. According to data from 2023, Lenovo will slightly surpass HP and Dell because it holds the highest share in laptops priced above $1000.

It is expected that Lenovo's AI PC revenue share will increase from about 2% in fiscal year 24 to about 53% in fiscal year 28, the highest among global PC OEMs. Following closely behind are HP with 52% of revenue from AI personal computers, followed by Acer (44%), Asus (41%), Dell (37%), and Apple (5%).

Why Lenovo stands out?

Regarding the positive outlook for Lenovo, Morgan Stanley pointed out that Lenovo has self-developed AI chips, the most comprehensive AI features, and an AI assistant.

Firstly, in terms of AI assistant, Lenovo introduced "Lenovo Xiaotian" at the Innovation Technology Conference last month. Morgan Stanley stated that Lenovo is the only company among the top five PC OEMs to launch this feature in China:

Compared to AI functions offered by other PC OEMs, Lenovo provides the most comprehensive products, maximizing creativity without affecting overall system performance by combining work-related functions (i.e., summaries of emails/documents) with text prediction, background blur, meeting records, and digital content tools. Additionally, it also has consumer-related functions (i.e., booking travel plans based on user preferences and weather conditions).

Secondly, compared to products of other competitors, Lenovo's AI assistant features are also prominent:

Accessibility: Lenovo Xiaotian is designed specifically for the Chinese market to adapt to the unique local ecosystem.

Offline access: As a personal LLM on a device, Xiaotian can work even in offline mode.

Voice recognition and natural language interaction: All AI/voice assistants can recognize the user's voice and interact with the user through natural language.

Answering basic or factual questions: All AI/voice assistants can correctly answer basic or factual questions, such as "How's the weather today?" or "How tall is Taipei 101?", without any issues.

Answering a series of related questions: When asked multiple related questions consecutively, Lenovo Xiaotian can remember previous questions and provide correct answers, demonstrating conversational ability. In comparison, Siri and Bixby have weaker capabilities in answering multiple related questions consecutively.

Device and third-party app control: Essentially, all AI/voice assistants can control devices or third-party apps In addition, Lenovo has more comprehensive AI PC features than other PC OEMs. Its AI features cover five main categories: network security enhancement, audio and video quality enhancement, power optimization/performance improvement, content generation, and personal assistant. Morgan Stanley believes that this may give consumers more factors to consider when choosing the next PC brand to purchase.

On the other hand, Lenovo has a more powerful self-developed AI chip, as pointed out by Morgan Stanley:

Lenovo's LA3 AI chip was initially designed for the gaming product line, but is now also equipped in Lenovo's commercial models. Lenovo claims that this chip can improve performance by 10-18%, which is a quite significant enhancement.

We will continue to monitor Lenovo's gaming PC market share in the coming quarters to see if integrating this chip into its gaming laptops brings any benefits