Lenovo Group Ltd. reported better-than-expected quarterly profit, affirming hopes for a gradual computing industry recovery driven by global AI spending.
Net income grew 38% to $243 million in the three months ended June, Lenovo said in a filing on Thursday. That compares with an average estimate for $231 million. Revenue rose 20% to $15.4 billion.
The results reflect how growing demand for the servers essential in artificial intelligence development is lifting the computing hardware market from its post-Covid slump. From Amazon.com Inc. to Google and Baidu Inc., big tech companies are raising spending on data centers at a rapid clip, preparing for an envisioned boom in AI services.
Lenovo extended its lead over HP Inc. and Dell Technologies Inc. with 14.7 million PCs shipped during the June quarter, according to research firm IDC. But the Chinese firm’s stock has lagged its rivals this year, in part because of worries about the world’s No. 2 economy and exposure to geopolitical tensions.
Chief Executive Officer Yang Yuanqing is betting on AI-powered devices to boost Lenovo’s global business in coming years, though that market remains untested.
The global PC market’s growth will accelerate to somewhere between 5% and 10% next year, “with the new refresh cycle driven by both AI-PC as well as Windows 11 replacement,” Yang told in an interview on Thursday. Despite Lenovo’s 1Q earnings beating consensus with revenue growth of 20%, rising trade tension could cap tightening of its dollar bonds, given the already-tight ratings headroom. We estimate an increase in $650 million of operating cost could lead to an increase in leverage to over 1x in 2024, triggering the negative ratings guideline. AI-powered devices could be a catalyst in the coming year.
Geopolitical risks, including possible new PC tariffs or chip-export restrictions by US or European regulators, remain a question mark for the 40-year-old company. The Biden administration has already slapped a series of curbs on exports to China of advanced chipmaking technologies and processors, including Nvidia Corp.’s most capable AI-training chips. Lenovo is by far the top seller of servers in the country.
Some of Nvidia’s GPUs, which are in hot demand for training AI models, are still limited in supply, “but overall the situation is getting better,” Yang said.
Lenovo shares slumped as much as 2.9% in Hong Kong in afternoon trading after the company published its financial results, before recouping some losses.
