U.S. Markets close in 3 hrs 40 mins

HP Loses the PC Crown to Lenovo Again -- But Does It Matter?

Leo Sun, The Motley Fool

Lenovo (NASDAQOTH: LNVGY) reclaimed its title as the top PC maker in the world from HP (NYSE: HPQ) during the third quarter of 2018, according to IDC. The Chinese PC maker previously lost the No. 1 market share position to HP in 2017 after five years on top.

Between the third quarter of 2017 and the third quarter of 2018, Lenovo's market share rose from 21.3% to 24%. During the same period, HP's share grew from 22.5% to 22.8%. Both vendors outpaced the growth of the overall PC market, which saw a 0.9% year-over-year decline in shipments. Should HP investors worry about Lenovo's sudden growth spurt?

A Lenovo laptop.

Image source: Lenovo.

How did Lenovo reclaim the crown?

Lenovo bought a majority stake in a joint venture with Fujitsu's (NASDAQOTH: FJTSF) PC unit in May. IDC attributes most of Lenovo's market share gains to higher sales of Fujitsu PCs.

It's unclear if Lenovo could have beaten HP without the Fujitsu PCs during the third quarter of 2018, since IDC didn't report the market shares of the two units separately. But in the prior-year quarter (before the deal closed), the inclusion of Fujitsu's PC business would have added 1.2 percentage points to Lenovo's market share -- which would have helped it tie HP as the world's top PC vendor with a 22.5% market share.

IDC attributed Lenovo's growth to "a marked improvement in its North American business" from "a revamped channel strategy and more stable management." Gartner, which also named Lenovo as the top PC maker during the third quarter, noted that the joint venture with Fujitsu helped it regain "traction in the commercial market."

Should HP be worried?

Lenovo's growth in North America, a stronghold for HP, raises some concerns about tougher competition. IDC notes that HP faced a "tough quarter" in the U.S. and Latin America, but that it still achieved its tenth consecutive quarter of year-over-year growth. Gartner noted that HP saw strong shipments of desktops, which "indicated strong demand among corporate buyers."

HP's total revenue in the Americas rose 7% annually last quarter and accounted for 45% of its top line. That growth looks solid, but it lags far behind its double-digit growth in the EMEA (Europe, Middle East, and Africa) and Asia-Pacific regions. HP's total Personal Systems (PC) revenue rose 12% year over year to $9.4 billion during the quarter.

An HP laptop.

Image source: HP.

Lenovo's PC sales are included in its PCSD (PC and Smart Devices) unit, which also sells tablets and smartphones. Last quarter, Lenovo's PCSD revenue rose 19% year over year to $8.3 billion, aided by the inclusion of Fujitsu-brand shipments. Lenovo states that it continued to gain market share in workstations, and that it was focusing more on premium PCs, including thinner and lighter laptops and gaming PCs -- which closely mirrors HP's high-end PC strategy.

Lenovo generated 33% of its total revenue from the Americas last quarter. It noted that the PC business delivered "double-digit shipments growth" in that region while expanding its margins year-over-year.

A trio of complicated headwinds

The competition between HP and Lenovo is further complicated by three other issues. First, higher tariffs could cause Lenovo's PCs to cost more in the U.S., and HP's PCs to cost more in China. They could also hurt both PC makers, which use a mixture of components from the U.S., China, and other countries.

Second, Intel's ongoing chip shortage is forcing HP and Lenovo to sell more AMD-powered PCs. It's unclear if that change will impact sales, since some consumers might wait for the next generation of Intel-powered PCs instead of buying AMD ones.

Lastly, the recent drama about Super Micro's motherboards -- which were hacked in Chinese factories to spy on American companies, according to Bloomberg -- raises tough questions about Lenovo's future in the U.S. Lenovo stated that it never worked with Super Micro "in any capacity," but nervous enterprise customers in the U.S. might think twice before placing bulk PC orders with Lenovo.

The bottom line

Lenovo's recent jump in PC market share might seem like bad news for HP, but that growth was mostly attributed to the Fujitsu deal. Instead, investors should note that HP and Lenovo are still growing year over year and outpacing the growth of the overall market.

Neither PC maker will render the other obsolete anytime soon, so investors should focus on the more pressing issues -- like tariffs, chip shortages, and hacked motherboards -- instead of which vendor sits on top of the market.

More From The Motley Fool

Leo Sun owns shares of HP. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.