Morgan Stanley upgrades Lenovo rating: From "memory headwinds" to "server profit boom"

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AI is reshaping the memory market landscape, with Lenovo transforming from a victim of cyclical pressures to a beneficiary of pricing power. Morgan Stanley has significantly raised Lenovo Group’s rating and target price.

According to trading desk news, on July 9, Morgan Stanley’s Howard Kao team upgraded Lenovo’s neutral rating to “overweight,” and sharply raised the target price from HK$14.20 to HK$30.00, about 34% higher than the closing price of HK$22.32 on July 8.

The report states that AI-driven demand has fundamentally changed the supply and demand structure of the memory market, enabling Lenovo to pass higher component costs onto customers while maintaining profit margins. The firm expects this trend to continue at least through the second half of 2026.

Morgan Stanley’s rating change is significant at the valuation level. The firm's EPS forecasts for fiscal years 2027-2029 are about 20% higher than market consensus, mainly due to stronger margin assumptions.

Over the past two months, Lenovo's stock price has surged 82%, while the Hang Seng Index fell 9% in the same period.

Chip price increases rewrite OEM pricing logic

This round of memory price increases differs fundamentally from previous cycles.

Morgan Stanley notes that in past memory up cycles, customers typically expected prices to fall and delayed purchases, which directly limited OEMs' ability to pass costs and ultimately put pressure on margins.

However, AI-driven demand is simultaneously tightening the supply of HBM, DRAM, and enterprise SSDs, while new capacity construction, certification, and ramp-up take years rather than quarters to complete.

Morgan Stanley thus believes the current environment should be seen as a structural shift in industry supply and demand relations, not a conventional semiconductor cycle fluctuation.

This shift profoundly changes customer behavior. At the 2026 ISC high-performance computing conference, Lenovo management stated that memory prices "may never return" to early 2025 levels. The management reiterated this judgment at the June 25 investor day in New York.

Morgan Stanley believes that since customers have adjusted expectations and no longer expect short-term memory price drops, and may even accelerate buying to avoid future price hikes, Lenovo has ample room to pass costs, thus fully transmitting higher component costs without sacrificing margins.

Morgan Stanley also notes that under current conditions, the ability to ensure memory supply is at least as important as price.

Lenovo has structural advantages here, including economies of scale from being the world’s largest PC manufacturer, long-term supplier relationships, and channels to access China’s domestic memory supply chain.

These factors enable Lenovo to secure components more effectively than most peers, maintain a lower cost structure, and prioritize margin protection without the need for price wars.

ISG rapidly rising, earnings structure transforms

Lenovo’s profit structure is undergoing deep changes, with the rise of its Infrastructure Solutions Group (ISG) as the key driver.

Morgan Stanley forecasts ISG revenue to grow from about $19.2 billion in fiscal 2026 to about $33.3 billion in 2027, a 74% increase, and further growth of 29% and 26% in 2028 and 2029, to $43.0 billion and $54.3 billion respectively.

This growth benefits from strong enterprise server demand, continued investment in hyperscale data centers, accelerated AI server deployment, and higher system ASPs supported by elevated component costs.

The shift in profit contribution may be even greater than on the revenue side.

Morgan Stanley predicts ISG will move from near break-even in 2026 to contributing about 35% of the group’s profit in 2029, with ISG operating margin expanding from 0.4% in 2026 to about 6.9%.

(The expansion and optimization of ISG's scale and business structure is expected to boost profits and improve ISG profitability)

By contrast, the share of Intelligent Devices Group (IDG, i.e. PCs and tablets) in group revenue is expected to fall from 67% in 2026 to 50% in 2029.

(Lenovo’s revenue composition, FY2024-2029)

Lenovo’s AI server order scale has reached about $21 billion, providing high visibility into future demand.

Morgan Stanley notes that for hyperscale customers, demand from key clients such as Microsoft and Oracle is expected to continue, while Lenovo is expanding its exposure to cloud services and sovereign AI projects. Management says there is currently no significant risk of orders shifting directly to ODMs.

PC business: Profitability first, volume conceded to maintain price

In its main PC business, Morgan Stanley expects Lenovo’s PC shipments (including desktop and notebook) in FY2027 to fall about 9% year-on-year to 63.4 million units, mainly due to memory supply constraints rather than weak end demand.

(Lenovo PC shipments and YoY change, FY2024-2029 forecast)

Despite lower shipments, higher average selling prices and optimized product structure are expected to drive PC revenue up about 8% year-on-year to $55 billion in FY2027, with operating margin maintained at around 7.7% and operating profit at about $4.3 billion.

(Despite lower shipments, Lenovo’s PC business revenue is expected to continue growing in FY2027-2029 as ASP rises)

Morgan Stanley believes Lenovo, thanks to scale and supplier relationship advantages, could gain market share, rising from 24.1% in FY2026 to about 26.0% in FY2027, despite supply constraints.

With global PC shipment expectations declining about 3%-4% (FY2028), Lenovo PC shipments are expected to remain stable, demonstrating sustained market share advantage.

Lenovo’s smartphone business faces greater pressure.

Unlike PCs, due to more intense competition in smartphones, Morgan Stanley believes Lenovo cannot fully pass higher component costs on to end consumers.

Phone shipments are expected to fall 13% YoY in FY2027, with operating margin dropping from 3.6% in FY2026 to 1.7%, and operating profit down about 55% YoY to about $127 million.

(Lenovo smartphone shipments YoY change, FY2024-2029 forecast)

Forecasts significantly above market, room for valuation re-rating

Morgan Stanley’s earnings forecasts are notably high and optimistic compared to the industry.

Although revenue forecasts for FY2027-2029 are only about 5% above market consensus, net profit forecasts are about 20% higher, mainly due to higher margin assumptions.

Specifically, Morgan Stanley forecasts net profit margins of 3.0%, 3.4%, and 3.8% in FY2027-2029, versus consensus of 2.6%, 3.0%, and 3.3%; operating margin forecasts during this period are 50-60 basis points above consensus.

For the upcoming Q1 FY2027 results (F1Q27), Morgan Stanley analyzes:

Revenue forecast $23.7 billion, 6% above consensus;Net profit forecast $681 million, 26% above consensus;Gross margin forecast 16.6%, up 190 basis points YoY, with “very high” probability for positive surprise.

(Morgan Stanley’s revenue expectations for Lenovo are 6% above consensus, net profit 26% above)

On valuations, the HK$30 target price equates to 13.5x FY2028 expected PE, higher than Lenovo’s three-year historical average of about 9.5x, but still below implied PE for Dell Tech infrastructure business of about 20x.

In sum-of-the-parts valuation (SOTP), Morgan Stanley applies 10x, 16x, and 15x FY2028 PE to PC business (IDG), ISG and service business (SSG) respectively, arriving at about 13x blended valuation, closely matching the residual income model conclusion.

(Morgan Stanley thinks Lenovo’s valuation deserves re-rating to 13x or higher)

Morgan Stanley notes in the report that as ISG’s profit contribution rises, investors may gradually reassess Lenovo as an infrastructure and AI solutions provider, pushing its valuation closer to Dell.

(Expected PE comparison between Dell and Lenovo)

Management’s medium-long-term goals announced at the June 25 investor day support this logic:

1-2 year target: revenue $100 billion, net profit margin 3%+3-5 year target: revenue $130 billion, net profit margin 5%+Over 5 years: revenue $150 billion, net profit margin 8%+

Morgan Stanley considers the 1-2 year target conservative, and current forecasts show Lenovo can basically achieve these metrics in FY2027.

(Morgan Stanley thinks Lenovo is likely to approach the $100 billion revenue target this fiscal year)

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