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We Just Found The New King Of The Computer Industry

30 | By Michael A. Robinson

During the Depression-ridden 1930s, with the United States circling the financial abyss, an American industrialist named Thomas J. Watson Jr. gambled the future of his business-equipment company on an expansion plan that included wholesale hiring, investments in technology, and the construction of new factories.

For six years, Watson had his factories at full bore – churning out tabulating equipment there were no buyers for. But he believed in his plan and stayed with his strategy.

When the Social Security Act of 1935 came up for bid – billed as “the biggest accounting operation of all time” – Watson’s company was the only firm able to supply the equipment needed to maintain the employment records of 26 million people.

The successful execution on this contract led to other government pacts. Not only did this allow Watson’s company to navigate the Depression; it set it up for long-term success.

That company went on to become one of the most-successful computer firms in history – the venture we now know as International Business Machines Corp. (NYSE: IBM).

“Big Blue,” as the company is also known, has been experiencing some tough problems in recent months. But its successful years made fortunes for many investors.

We believe investors can reap the same windfall from the company that’s poised to replace IBM as the new king of the computer industry.

We’ve identified that successor – and are going to bring it to you today.

From Leader to Laggard

Back on Jan. 21, IBM announced that fourth quarter sales had fallen 5%.

That sounds like the kind of small decline that really shouldn’t worry investors. After all, profits rose about 6% from the year-ago quarter to about $6.2 billion.

But this was the seventh straight quarter that revenue fell. And Big Blue said it was taking a $1 billion first-quarter hit to cover restructuring costs.

Even as IBM tries to make itself over – which it has successfully done before – another firm is poised to take its place at the head of the sector table.

That company is Lenovo Group Ltd. (OTC: LNVGY). And it’s poised to become the Next IBM – and Big Blue is helping make this happen.

Let’s Make a Deal

On Jan. 23, Lenovo agreed to pay $2.3 billion for Big Blue’s low-end server business. This is the second major deal between the two companies in less than a decade; Lenovo bought IBM’s struggling PC business back in 2005.

Founded in a Chinese guard shack back in 1984, Beijing-based Lenovo today stands as the world’s largest PC company. It’s also a leading global supplier of smartphones and tablet computers.

Buying IBM’s server unit makes a lot of sense. Despite all its experience, IBM couldn’t keep costs under control and still compete in a global market. Last year, the so-called “x86” server line lost $26.4 million.

But Lenovo is known for its strict cost discipline. Bernstein Research notes that IBM had a cost ratio of more than 20% of sales. Lenovo, on the other hand, generally keeps those costs at around 10%.

The deal automatically transforms Lenovo into the world’s No. 3 vendor of these servers, giving it a 14% share worldwide and $4.7 billion in sales.

In Lenovo’s home market of China, sales of these servers are expected to grow between 5% a year and 8% a year – more than twice the industry growth rate – as the world’s most populous nation builds new computer data centers to keep up with its economic growth.

This acquisition hands Lenovo some excellent built-in synergies. With its global supply chain, it can roll out this business very quickly – incurring only nominal additional costs for their distribution.

More to the point, the company also quietly agreed to take roughly 7,500 IBM workers as part of the package. Many of these are longtime employees who know the server market inside and out.

That alone will save Lenovo millions in hiring costs. It also gives them access to many of the employees who helped build the business and know where to look for hidden efficiencies.

And Lenovo has deep experience in taking the units that no longer fit IBM and creating enormous shareholder value.

When Lenovo bought IBM’s PC business in 2005, the Chinese upstart had a 6.4% market share. Today, that figure stands at nearly 17%. It’s the only PC firm with any significant market share gains over the last decade.

On a personal note, my wife is one of the reasons why Lenovo is doing so well with its PCs. She’s a technology expert and oversees the IT department at work.

She recently got a new Lenovo ThinkPad Yoga that she just loves. It’s perfect for a busy professional — the Yoga functions as both a laptop and a tablet.

For Lenovo to make a device that can impress a seasoned veteran says a lot about the firm’s high design and production standards.

That’s critical because the market is clearly going mobile, where smart phones and tablets outsell PCs by a factor of 5-to1. But this vital stat doesn’t have Lenovo worried.

Instead, the firm sees itself as a leader in what it calls the"PC+ world" that links multiple devices in a tech ecosystem.

And market researcher IDC agrees. It recently ranked Lenovo as No. 3 in market share for “smart connected devices” that combine PCs, smartphones and tablets.

It’s hitting the mobile world hard. Lenovo ranks fourth in global sales of both tablets and smart phones with a roughly 4.8% share, according to IDC and internal research.

For smartphones alone, it plans to enter 20 new markets by the middle of this year. That follows a 72% year-over-year gain in the second quarter.

And another new deal will help Lenovo achieve its goals.

Let’s Make a Deal (II)

Just this week, Lenovo announced that it’s buying the Motorola phone business owned by search giant Google Inc. (Nasdaq: GOOG) for $2.9 billion.

The acquisition is a shrewd one for Lenovo that will turn Google’s failure into a major success that already fits into the Chinese company’s long-range strategic plan. Lenovo already ranks fourth in the world in both smartphones and tablets. This should supercharge its growth efforts in the mobile realm.

It also opens up a lot of unique marketing and branding opportunities. For instance, it can sell the Lenovo-branded phones in Asia and Motorola ones in the U.S. and European markets.

But it also can reverse-migrate the phones, selling a premium unit like “Motorola by Lenovo” in China, and then “Lenovo by Motorola” in the United States.

Clearly, this is a company that is transforming itself into a global high-tech powerhouse.

The company has a market value of $13 billion, and its shares trade at roughly $25 a share. The company has a 27% return on stockholders’ equity (ROE) and recently grew quarterly earnings by 35%. The shares trade at roughly 15 times projected 2015 earnings.

I’d like to see higher profit margins. But I think that will follow in the next couple of quarters because earnings are growing twice as fast as sales.

The bottom line: I believe the stock could gain 50% over roughly the next year – making this the kind of high-return “special-situation” play that are so tough to find.

These high-probability profit plays create a nice foundation that allows us to pursue the more-aggressive double-your-money profit opportunities that are the focus of the Strategic Tech Investor.

In fact, as I’ve mentioned over the last several weeks, stocks aren’t the only investment that I’m watching closely right now

I’ve also got my eye on a phenomenon that is white-hot.

I’m referring to “Bitcoins.”

If you’ve been following the headlines about Bitcoins of late, you know that the “virtual currency” recently soared from $131 to $1,150 in just the past two months – a return of 778%.

It has recently settled down a bit, trading consistently around $900 a Bitcoin. But to me the that just means the buying opportunity is better than ever. Not to mention it’s one heck of a story.

Whether you get involved with Bitcoin now, or want to think about it for the future, I’ve put together an amazing way for you to learn everything about it. Take a look here and you’ll see what I mean.

[Editor’s Note: Michael values your comments. Tell us how you’re doing with the companies you’ve heard about here and what you’d like to see in the future. Your comments will be very useful in making Strategic Tech Investor the best free tech e-letter around.]

30 Responses to We Just Found The New King Of The Computer Industry

  1. Robert Burnett says:

    Am I a paid enroller of your newsletter? I have signed up for a couple of these online newletters and I saw your email regarding a paid newsletter for 49$ per year and I would be interested if I am not a paid subscriber myself. BOB

  2. Ronald says:

    I bought the service and followed bitcoin suggestions. The videos is now outdated since it mkves so fast. I opened with coinbase and bought the havelock funds just to make sure I had some positions. What is your entry and sell strategy? Do u think china will reverse their bitcoin decision. What should one do now? The havelock percentage rates are very low now.

    If you care to respond. Very curious what you are thinking now.

  3. Frederick says:

    Not so sure about Bitcoin how can you trust something which is so opaque, not properly understood and cannot be supervised, maybe it is good for the promoters, those who bought in early.Reminds me of an explorer in the mining sector , a lot of hype but no assets on the ground

  4. Thom Fielding says:

    The Yoga is, of course, an redesigned version of the original x41 tablet which was and IBM product before Lenovo bought their PC division. Newest technology, size and weight put it in competition with newer tablets.

    • Michael Robinson says:

      Hi Bob,

      Thanks for taking the time to write to me and share your comments. As regards CRM, that might help but I’m not sure it’s the answer just now. Fact is, IBM has changed focus over the years to become far more of a services and software company. Yet, it’s still faces challenges in a market that has shifted to the cloud and mobile platforms. I’d like to see IBM conduct the restructuring before it announces any new mergers, or at the very least explain how those purchases fit into the long-term strategy. Hope that helps,

      Michael

  5. Terry says:

    What is wrong with America? The govt is trying to make all business operate like a govt. Bureaucratic and wasteful, and bloated. The people that started America took lots of risk, as did the guy that started IBM and endless other risk takers. Including everyone that has to cross a street if they think the govt will solve all their risk and don’t look both ways before stepping off the curb.

    Govt is actually the anti-thesis of business and labor unions and even workers and everyone that is a non-govt employee. Elected officials actually do take risk because they have to stand for election. While companies have to stand on their sales/services and workers have to stand for their job performance.

    Mean while elected officials have spent decades feathering their nests in an attempt to eliminate the risk of not getting elected. In the interest in being charitable toward them I will assume they have a guilty conscience about all their feather bedding of perks and obscene raises is why they are so generous of giving taxpayers money away to both the owners of the fed res and all the welfare/social services. And don’t do this in sort of an endless vote buying scheme? But I don’t know why the crats don’t try and create job programs like the WPA and soup lines of the GD days? Surely these are not methods to control citizens?

    Do you suppose that our elected officials are fossilized because they have been in office so long? Thus they keep on deficit spending even though it has not worked in solving anything but they keep on overspending, year after year, decade after decade? Are they insane? They keep on doing the same old thing and always expect a different outcome?

  6. Bonnie Davis says:

    Still have a half posotion in Kratos. WIll buy Lenovo. Also, on your rec, I bought Bitcoin. I’m having a lot of fun as a result of Nova- X.. Thank you.

    • Michael Robinson says:

      Hi Bonnie,

      It’s great to hear from you. Thanks for checking in. I’m glad to hear things are going so well. Cheers and best wishes,

      Michael

  7. Dan Herriott says:

    As always, thanks for the analysis Michael. I’ve been curious about Lenovo for awhile and you’ve just confirmed and/or enhanced my suspicions. It’s been trading within a nice upward channel for a long time now, recently hitting another 52 week high of $27.99 on Jan 29th. I want a ride on this train, but will wait for a pullback to at least the mid twenties before buying a ticket. Keep up the good work!

  8. Arem says:

    Lenovo Group Limited is LNVGY in the US OTC market.

    Michael — how about some options scenarios rather then outright stock ownership AT THIS TIME?

    • Michael Robinson says:

      Hi Arem,

      Thanks for taking the time to contact me. I appreciate your support. As for options, I understand where you’re coming from. However, that is beyond the scope of what we do here at Strategic Tech Investor. This service is more about the big trends and looking at long-term positions. Right now, we divide our investments into foundational, growth oriented and special situations. But all of the involve taking an equity position. Hope that helps.

      Cheers and best wishes,

      Michael

  9. Richard L. Sobota says:

    With the aquisitions you mentioned and some inovative stategic planning, Lenovo sounds like its on the way up. Let me know its symbol ASAp.

  10. steve says:

    Charles:

    Hidden in the article:

    “that company is Lenovo Group Ltd. (OTC: LNVGY). And it’s poised to become the “Next IBM“ – and Big Blue is helping make this happen.”

  11. Martin Hendrix says:

    Just read Lenovo artical. Just the kind of information I am looking for as I’m normaly a long term value invester that likes to play around a little in spec stocks, just for the heck of it.

  12. Sun bao_ku says:

    In my opinion:There’ still solid base technology grasped by IBM. There’s An idom in China “A lean camel is larger than a horse”.Perhaps need next years, The Lenovo becomes The New King Of The Computer Industry.

  13. Ronald W Robinson says:

    I am interested in buying into bitcoms, how ? without buying all these dvds and books. I just want to buy. ok

  14. Deborah says:

    We are selling America one bit at a time until the yellow scare will be the new normal. We have a globalist President who doesn’t care on whit about America and has made sure we have lost our competative edge by his policies. Exploiters like China have been given a free pass to take our best. Until we get rid of the business UNFRIENDLY tax policies and Obama’s entire left wing ideology the Communists will have taken America without a whimper from the lemmings who are more worried about benefits than prosperity

  15. Jack says:

    I like your analysis on Lenovo. Especiallly with your wife’s expert opinion. The other situation with Bitcoins is harder to fully understand. Maybe you could elaborate on your analysis of that stock. Thank you,

    Jack C.

  16. Dan says:

    I find it interesting, and a bit disconcerting, that Lenovo is building out its infrastructure by buying all the money-losing divisions of US companies. Even if Lenovo’s management is world class and highly innovative, they have their work cut out for them.

  17. Mike H says:

    Michael, Are you still recommending Bitcoin after the big drop this past week or are you concerned about the recent events?

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