Profits from Consumer Tech

Written By Jason Stutman

Posted September 11, 2013

In the midst of a highly saturated consumer tech market, one company has managed to increase sales at a faster rate than any of its industry peers.

And no, we aren’t talking by a hair here… This company is absolutely crushing it in terms of growth.

Eight years ago, most people had no idea that this company even existed.

Today it is the largest computer manufacturer in the world.

This is truly an underdog story.

I’m going to tell you more about this company in just a minute, but first take a look at a striking growth trend in consumer tech:

smartphone growth by price

The chart above highlights the growing demand for smartphones, split by price.

As you can see, the rate of demand for high-end phones is declining rapidly, while the rate of demand for low-end phones has remained consistently strong.

And this trend doesn’t just apply to phones. It is apparent across the board in consumer tech. Demand for premium tablets such as the iPad was down 11.6% last quarter, while demand for entry level tablets was up 181%.

By sacrificing margins, a few tech companies have ruthlessly been swiping market share from their highfalutin competitors.

The verdict is in — and consumers want cheap.

Predatory Pricing

Lenovo Group Limited (OTC: LNVGY) currently derives 80% of its total revenue directly from the PC market. With global laptop sales down 7.4% and desktop PC sales down 14%, this would usually be a major red flag. However, Lenovo’s recent track record is proof that diamonds do lurk in the rough.

In the first quarter of this year, Lenovo reached record revenues of $8.8 billion. In the same time frame, the company’s net profit grew 23% to $174 million, or $1.67 earnings per share.

Despite declining global laptop sales, Lenovo’s laptop sales grew a respectable 4.7% to $4.5 billion. And while its desktop PC sales fell 2.8% to $2.5 billion, the company overtook HP and Dell as the world’s largest PC provider.

Lenovo’s ability to gain traction in an already saturated PC market is a direct result of the company’s aggressive pricing model. Lenovo’s margins are carnivorously thin. And the bottom line shows us that cheap is profitable in consumer tech…

Lenovo’s earnings are up 23%.

Alpha Dog

Now, some will try to tell you that the PC market is done with. And in many respects, they are absolutely correct…

PC growth reached its peak in 2003, and mobile device sales have clearly taken their toll on the industry.

However, tablets and smartphones are not universal replacements for PCs — and any analyst who tells you differently is ironically typing those words on a keyboard connected to a PC.

Let’s be clear about one thing, though: PC sales are not going to rebound. They will flatten out.

However, so long as cubicles across the globe have desktop PCs, you can expect this industry to hold its ground, as commercial sales make up the bulk of PC purchases.

This is precisely where Lenovo’s financial stability comes in…

The company was willing to gain control of an industry that others were running away from. Now that Lenovo dominates the PC market, it is able to safely branch out into growing domains.

This year, Lenovo’s smartphone sales absolutely exploded: The company’s global smartphone revenue jumped 144% from a year earlier and now accounts for 14% of the company’s total revenue.

The figures are significant enough to officially consider Lenovo a top competitor in the mobile device market. In fact, Lenovo now ranks third in total worldwide smartphone shipments.

While it is well-known that the high-end smartphone market is becoming heavily saturated, there is major growth potential left in entry level markets — particularly in China and India, where smartphone shipments have increased by 108% and 129% respectively over the last year.

And it’s for exactly this reason that high-end retailers such as Apple (NASDAQ: AAPL) are now willing to water down their brand with cheap alternatives, like the iPhone5C.

But Apple’s financial success has stemmed largely from its high margins, and it will have difficulty partaking in the competitive pricing of a low-end market.

Ultimately, Chinese vendors will continue to be the fastest-growing companies in the smartphone industry. Besides Yulong Computer’s 216% growth in unit sales, Lenovo has had a clear lead in terms of global momentum over the past year, not to mention Lenovo overtook Yulong’s growth rate in the most recent quarter.

Sure, Apple might make a better product, but mobile providers in China and India don’t subsidize their phones with contracts, as is customary in the United States…

Regardless of your opinion on the products themselves, the bottom line is that Lenovo has increased its global unit sales at six times Apple’s pace — not to mention the company has crushed just about every competitor in terms of revenue and earnings growth.

Lenovo is currently trading at $20.63 a share.

The stock has gone more than five months without closing above $20.50 at the end of weekly trading.

lenovo resistance

I’m expecting Lenovo to break this resistance line very soon…

Invest accordingly.

Turning progress to profits,

  JS Sig

Jason Stutman

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