Xiaomi’s growth has decelerated from its glory days. Can CEO Lei Jun turn it around?
Initially, Xiaomi Corp ‘s (SEHK: 1810) business plan seemed brilliant. The company sold iPhone-like premium phones near cost while simultaneously selling investors on the vision that they would make money from services. The company rode this strategy to great heights, with its success culminating in an IPO in Hong Kong at a US $ 54 billion valuation.
But then the approach didn’t work as well. Since its IPO, Xiaomi’s stock price has fallen from HK $ 17 to HK $ 13.24.
A potential US $ 1.5 billion buyback authorization, new phone launches, and further expansion into the internet of things, has failed to reinvigorate Xiaomi’s stock price.
Here are three reasons why Xiaomi’s stock price hasn’t done very well:
Company Growth is Slowing
Xiaomi’s hypergrowth days seem squarely in the past.
For the third quarter, the company reported total sales growth of only 5.5% year-on-year, a substantial deceleration from the growth in past quarters. In terms of Xiaomi’s core business, growth is going the opposite way.
For the quarter ending on September 30, Xiaomi’s smartphone sales fell 8% year-on-year to 32.3 billion yuan, and shipments fell by over a million units. Meanwhile, Xiaomi’s internet services division, which was the company’s key profit-generating strategy, compromised only 10% of total sales.
Given these results, Xiaomi seems to need a new hit product or new strategy if it wants to push its stock price considerably higher.
Huawei is A Big Competitor
Huawei has been an absolute force in China.
Besides Apple (NASDAQ: AAPL), Huawei was the only major smartphone maker to increase its market share in the third quarter. According to IDC, Huawei increased its China smartphone shipments 64.6% year-on-year in the third quarter, amounting to 41.5 million units (representing 42% market share). Due to Huawei’s strength, Xiaomi’s shipments in China fell 30.5% year-on-year to 9.7 million units, giving it only 9.8% of the total smartphone market share.
Globally, Huawei is also strong. In the third quarter, Huawei grew its global smartphone shipments 28.2% year-on-year to 66.6 million units, giving it 14.6% of the global market share.
Xiaomi’s market share fell 3.3% year-on-year to 32.7 million smartphones shipped, giving it only 9.5% of the total global market share. If the trade tensions between China and the US end, Huawei could be even more competitive because it could potentially use Android again.
Xiaomi will have more competition from Apple
Due to a legal fight, Apple ‘s iPhone doesn’t have 5G yet.
Once Apple incorporates 5G, Xiaomi will have more competition globally. Beyond that, Apple has been focusing more on the lower end of the market lately. Rather than just selling previous versions of the iPhone at a lower price, Apple is rumored to be planning the launch of a new phone designed specifically for the non-premium end of the market.
Is the Stock a Buy?
Given the company’s popularity in India and its customer base of millions of loyal users, Xiaomi certainly has potential. If Xiaomi launches a hit product or executes better, its stock could soar. Apple at one point almost went bankrupt before becoming a trillion dollar company after all.
CEO Lei Jun is also widely regarded as one of China tech’s top executives. It has not been wise to count him out.
Given Xiaomi’s growth trajectory, the not-cheap consensus forward P / E ratio of around 24.6, and the overall market saturation in the smartphone market, Xiaomi needs either better execution or another product / strategy to be a really compelling buy.
At the end of the day, it’s really hard to make money from smartphones.
Besides Apple (which has a great position in the premium end of the market) and Alphabet (which mainly sells operating system software), the scale necessary to turn a considerable profit from smartphone hardware is beyond the reach of all but Samsung (NASDAQ: SSNLF ) and a handful of other players.
Foolish conclusion
From a valuation standpoint and given the current data points, Xiaomi’s upside isn’t as high as that of some other companies.