Shares of Lenovo Group Ltd. ( LNVGF ) (OTC:LNVGF) (OTC:LNVGY) were under fire last month after it announced its latest results for its third fiscal quarter through December. The stock fell as much as 9.3% at one point in the next trading day, though it later pared some of those losses and ultimately closed down 3.3% at HK$8.55 for the day. Still, the loss made Lenovo ( LNVGF ) a blue-chip dog for the day, behind only local developer Wharf Real Estate (1997.HK).

So, why all the jitters? After all, the PC giant pointed out its revenue of $15.7 billion for the three months to December was up sequentially for a third consecutive quarter, while its $337 million profit was up 35% from the previous quarter. 

But the picture wasn't quite as rosy on a year-over-year basis, with the latest revenue figure up just 3% from the year-ago quarter. Profit looked even worse, falling 23% on a year-on-year basis. Cumulatively, the company's revenue was down 13% year-on-year during the first nine months of its fiscal year, while its profit slumped 49%.

Losing Investor Favor

The sequential revenue gains over the last three quarters may reflect some improvement in its performance, but Lenovo ( LNVGF ) has yet to convince an analyst community worried about its longer-term prospects. A number of those analysts lowered their price targets for the company anywhere from 4% and 19%. Bank of America made one of the biggest cuts, dropping its target from HK$11.20 to HK$9.10. CLSA cut its target by a smaller amount from HK$10.90 to HK$9.60, but also downgraded the stock from a "buy" to "outperform." UBS maintained a "sell" rating on the company.

The chilly attitude stems from a generally bearish view on Lenovo's ( LNVGF ) server business, which is expected to remain in the red over the coming quarters on heavy spending for new product development. At the same time, no one was too excited about the company's generally weak guidance.

But Lenovo ( LNVGF ) still has at least one fan in the analyst community, as HSBC took the contrarian step of raising its target price on the company from HK$11.40 to HK$11.70 and maintained its "buy" rating. HSBC also pointed out that Lenovo's ( LNVGF ) operating margins have beat its own and the market's expectations, and expects the company's global server business to break even in 2025.

High Hopes For AI PCs

The market may not be bullish on Lenovo's ( LNVGF ) stock over the short-term, but many have higher hopes over the longer term depending on how it progresses in the emerging area of PCs using artificial intelligence, or AI PCs. Excitement about the potential for AI in PCs has powered many related company stocks these days, including a 32% rise for rival Dell last Friday after the company reported stronger-than-expected server sales due to high demand for its AI-optimized models.

The rise of hybrid AI PCs will drive a new wave of demand for PC upgrades, putting sales back on a stronger growth track, said Lenovo ( LNVGF ) Chairman and CEO Yang Yuanqing. He added the company expects that more than half of all PCs will be equipped with AI functions by 2026.

With so much at stake, Lenovo ( LNVGF ) - like all of its rivals - is sparing no expense to strengthen its hand in the upcoming AI era. The company said it plans to boost its investment in product innovation until R&D staff make up more than a quarter of its total employees. It also expects the R&D spending ratio for its current fiscal year to reach a record high.

In a conference call with investors following the release of its latest report, executive vice president and Lenovo China President Liu Jun discussed the upcoming launch of two AI PCs in the $1,000 to $1,500 price range at the company's Innovation Technology Conference in April. That means all eyes will turn to the company again next month to see what it has to offer in this critical area.

PC Skeptics 

But there's also no lack of skeptics who doubt whether demand for AI PCs will lead to a sales renaissance for the mature industry. The global PC market is still posting weak growth in the post-Covid period, with data tracking firm IDC forecasting only 3.1% average annual growth through 2027. Put differently, IDC doesn't seem to expect that AI PCs will breathe major new life into overall sales even if they become the next big thing.

At the same time, there's no guarantee that Lenovo ( LNVGF ) will profit handsomely from AI PCs, and that the big profits may instead go to other players in its supply chain. A similar case is new energy technology, where lithium suppliers are emerging as some of the biggest winners while manufacturers struggle to stay in business. Similarly, other companies that supply high-tech components for PCs, such as chip manufacturers like Nvidia ( NVDA ) and AMD , could end up the biggest winners in the move to AI PCs.

Then there are also rising concerns over whether the U.S might prohibit or limit American companies from selling cutting-edge chips to China, which could set back players from related Chinese industries.

The potential for such action surfaced in a Newsweek article a year ago, in which an expert recommended a U.S. ban on the use of Lenovo ( LNVGF ) computers over suspicions the company illegally obtained PC users' information. Bloomberg Businessweek later exposed that the organization behind the recommendation, China Tech Threat (CTT), had close relations with Dell, implying the move was an instance of one rival attacking another rather than a case of a real security threat.

Still, concerns will inevitably remain. After all, Washington is quite wary of China's rise, taking regular steps to stymie Chinese tech companies in certain areas like AI and cutting-edge microchips. So, Lenovo ( LNVGF ), as a leader in the industry, could easily fall into Washington's crosshairs. With so many question marks hanging over the company, it's no wonder investors are cautious.