Summary of Key Points
This article discusses the stories of two established technology companies: Oracle and Lenovo. Both were once viewed by the market as “unimaginative old firms” due to the maturity of their core businesses and the stagnation in growth. However, the wave of AI has presented them with new opportunities. Oracle has made a comeback with its AI-based cloud services, while Lenovo has regained its status as a growth stock thanks to massive potential orders for AI servers (amounting to $54 billion). Nevertheless, there are challenges lurking behind these successes:
- Oracle: The company faced difficulties with cash flow due to the need to invest heavily in building data centers ahead of time. Its stock price dropped by half from its historical high as investors were concerned about its ability to recoup these costs.
- Lenovo: While it was once the global leader in PCs, its growth was constrained by the short lifecycle of these devices. The pandemic led to a decline in PC sales, and Lenovo’s revenue also decreased in 2023, with global PC shipments falling by 14.8%. The market's focus is on when the next round of PC replacements will occur, with little expectation for significant growth.
In short, although their core businesses are still profitable, their future prospects seem limited, and market valuations remain low.
The “Youthful Boost” from AI: A Turning Point from Stagnation to Growth
The advent of AI has given these companies a new lease on life:
- Oracle: It has capitalized on the demand for computing power and databases in the AI sector. By integrating its database solutions into cloud platforms like AWS and Azure, it allows customers to use AI without having to transfer data manually. Additionally, it has invested in building data centers and signed a $300 billion partnership with OpenAI. As a result, its outstanding orders (RPO) surged from $138 billion to $455 billion, a year-on-year increase of 359%, which has made it appear more dynamic.
- Lenovo: The company had already positioned itself in the server market, and now the demand for AI servers has exploded. In collaboration with NVIDIA, Lenovo has launched AI infrastructure solutions, generating potential AI server orders of $54 billion in the latest quarter, a 157% increase from the previous quarter. This marks Lenovo’s first growth opportunity outside of its PC business, attracting renewed market attention.
The underlying logic is simple: AI requires substantial computing power and data centers, which these established companies possess, enabling them to meet this growing demand.
More Orders Don’t Equal Easy Profit: Hidden Costs and Risks
However, the large number of orders does not guarantee easy profits:
- Oracle’s lesson: Having many orders means significant upfront investments. To fulfill its obligations to OpenAI, Oracle’s capital expenditures for the 2026 fiscal year (including data center construction and GPU purchases) will reach $55.7 billion, resulting in a negative free cash flow of $23.7 billion. Its stock price has plummeted as investors doubt its ability to turn these investments into profits.
- Lenovo’s challenges:
- Order fulfillment: The $54 billion is merely potential business, not confirmed contracts. Whether this can be converted into actual revenue depends on the company’s supply chain and delivery capabilities.
- Low profit margins: Similar to Dell, Lenovo’s AI server revenue has increased significantly, but overall gross margins have decreased due to high costs (such as expensive GPUs). Its current server profit margin is only in the single digits. Whether it can maintain or improve these margins with AI servers remains uncertain.
In other words, while orders represent a potential opportunity, they require substantial investment and there are concerns about whether the products will be profitable to sell.
Lenovo’s Critical Test: Profit Margin as the Ultimate Metric
Lenovo now has a similar situation to Oracle, but its success will depend on two key factors:
- Order conversion: Turning the $54 billion in potential orders into actual revenue requires addressing supply chain and delivery issues.
- Profit improvement: Given the low profit margins of AI servers, Lenovo needs to explore additional revenue streams through value-added services (such as liquid cooling technology, maintenance, and software solutions). By providing comprehensive services, it can increase the value of each server sold.
The market is excited about Lenovo’s new prospects, but the key to its future valuation will be the actual profit generated by these orders, not just the volume of orders received.
Conclusion
AI has provided established technology companies with a chance for a “second spring,” but this comes with challenges: they must not only secure these orders but also manage costs and improve profitability. Oracle’s experience shows that having many orders does not equate to success. For Lenovo to become the next “resurgent giant,” it needs to transform these orders into substantial profits. Investors should focus on how these companies generate revenue, not just on the volume of orders, when evaluating their AI-related initiatives.