1 Reason Why Xiaomi Shares Have Surged Despite Covid-19

Despite the coronavirus outbreak, the shares of several leading smartphone makers have done very well in 2020.

In the US, Apple Inc (NASDAQ: AAPL) reached a US$2 trillion market cap this year, becoming the first American company to achieve that valuation.

In Hong Kong, Xiaomi Corp (SEHK: 1810) shares have also surged. As of early September, Xiaomi shares have more than doubled year-to-date. Investors are optimistic due to the 5G supercycle.

Not only will 5G increase demand overall, but also the technology will very likely increase demand for premium higher margin phones.

In the longer term, many investors expect 5G’s fast speeds and low latency to create new applications that phone makers can profit from via app stores.

It could also help with demand for Internet of Things (IoT) devices in the future, another area that Xiaomi is targeting with its “Smartphone x AIoT” strategy.

It’s a win-win for the smartphone makers who adapt. In addition to optimism over the 5G supercycle, Xiaomi shares have surged due to its second-quarter results.

Here’s more on how the leading smartphone maker did.

Second-quarter results

For the three months ended 30 June, 2020, Xiaomi’s sales rose 3.1% year-on-year and adjusted net profit decreased by 7.2% year-on-year to RMB 3.37 billion (US$493 million).

Sales of Xiaomi’s smartphone segment fell 1.2% year-on-year due to Covid-19 headwinds. The company sold 28.3 million smartphones in the quarter, down from 32.1 million units in the prior year’s second quarter.

Meanwhile, sales of Xiaomi’s IoT and lifestyle products division rose 2.1% year-on-year.

Potential reasons for optimism

Although Xiaomi’s adjusted net profit fell, the market expected weak results due to headwinds such as Covid-19 and macroeconomic softness around the world.

In terms of its report, Xiaomi’s results may have been better than expected for many investors. There were also several potential reasons for optimism in the second quarter.

One potential reason for investor optimism over Xiaomi’s report was higher average selling prices – Xiaomi’s ASP rose 11.8% year-on-year as the company sold more mid- to higher-end phones in terms of proportion of sales.

If Xiaomi sells higher-priced phones, it could potentially find it easier to sell higher-margin services in the future.

Another potential reason for optimism is the fairly rapidly-rebounding demand. Xiaomi said:

“In April and May 2020, several of our key markets implemented strict lockdown measures and our sales were greatly impacted. As business restrictions were gradually lifted, our sales have recovered tangibly.

In July 2020, the average daily number of smartphone activations in the overseas markets surpassed the pre-pandemic level recorded in January 2020.”

Yet another potential reason for optimism is Xiaomi’s increasing user base and internet services sales.

In June 2020, Xiaomi’s global monthly active users of its MIUI platform was 343.5 million, up 23.3% year-on-year. Sales from Xiaomi’s internet services segment also rose 29% year-on-year to RMB 5.9 billion, well above Xiaomi’s overall revenue growth.

Given that Xiaomi is trying to make money from services, having more users for its own operating system and more sales from its internet services segment are definitely good things.

Foolish conclusion

Despite the coronavirus outbreak, Xiaomi continued to grow in terms of sales for the second quarter. The company’s internet services division also did well.

The smartphone is prime real estate and something that many people consider essential.

If Xiaomi does a good job in keeping users within its ecosystem, and 5G creates applications that generate high margin income for Xiaomi, the stock has further upside in the long term.