As impressive as these results are, the prevailing bearish thesis has been the company's margins. In fairness, I don't believe Lenovo has ever demonstrated any struggles in leverage despite well over 80% of its revenue coming from PCs (laptops and desktops). Despite the dismal PC environment, Lenovo still advanced gross margin by 1.5%, which was 70 basis points higher than Street estimates. Likewise, operating margin beat estimates by 40 basis points.

The fact that the company is up to its neck in PCs scares investors. Management understands this, however. This is why Lenovo's future hinges upon its ability to better diversify itself into a legitimate mobile player. While the company has been making great strides in its diversification efforts, there's now a heightened sense of urgency.

For the first time in nine quarters, Lenovo saw a decline in its China PC business. Again, this is not a surprise given a 14% decline in worldwide PC shipments, according to IDC. But Lenovo, which enjoys well over 35% share of the Chinese market, can't afford to let this slippage become a trend. To that end, the company's Mobile Internet Digital Home (MIDH) segment has been an excellent offsetting vehicle.

The MIDH division comprises of "every non-PC" aspect of the business, including smartphones, which grew 206% in the fourth quarter. Remarkably, for the second consecutive quarter, Lenovo's smarphone business, which gained an additional 3.5% market share to an overall 13% share, is outgrowing the overall Chinese smartphone market, which grew in the quarter at a rate of 117%.

Meanwhile, total MIDH revenue surged 74% year over year and now accounts for 9% of the company's overall sales. I don't believe Apple and Samsung fear these results today, but it's nonetheless encouraging that MIDH segment is growing at such a brisk pace to the extent that the business has achieved profitability in such a short period of time.

Bottom Line

Lenovo deserves more love than it gets from investors, given how solidly the company has executed over the past couple of years. The stock price has not reflected that level of performance.

Despite the market's pessimism and anti-PC bias, these shares look too cheap on the basis of the company's free-cash-flow growth and dominance in emerging markets. Couple this with Lenovo increasing market share in mobile devices and a fast-growing MIDH segment, this stock can command a long-term fair market value of $30.

At the time of publication the author had a position in AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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