Xiaomi Q3 19 – Approaching reality

Xiaomi finds a bottom.

• Xiaomi has weathered Huawei’s market share gains in its home market extremely well which combined with growth in its ecosystem leads me to think that the shares have pretty much found the bottom.
• Q3 19 results were encouraging with weakness in smartphones being offset by strength in its other consumer electronics products.
• Smartphone shipments fell by 7.7% to 32.3m units as a result of Huawei’s significant market share gains in China.
• This was offset by a 44.4% gain in other consumer electronics such as TVs, smartwatches and most recently, refrigerators.
• Its usage statistics are also encouraging with 291.6m monthly active users (MaUs) of its MIUI user experience (up 30% YoY).
• It also has 23.9m MaUs of its TV as well as 57.9m MaU of its digital assistant.
• However, these have yet to translate into real revenue as its internet services business registered 12.3% growth YoY where both advertising and online games languished.
• This is a sign that Xiaomi has yet to really get over the problem that has beset it since long-before its IPO.
• This issue remains proper user engagement with its ecosystem and services beyond the basic user experience it offers on its devices.
• Outside of China Xiaomi sells Google Ecosystem devices and inside China, it is all about Tencent, Alibaba, ByteDance and Baidu.
• This leaves it having to fight for user attention against large, popular and well-established services.
• I suspect that the vast majority of its users spend far more time with Alibaba, Tencent and Google than they do with Xiaomi’s own offerings.
• This remains the key challenge for Xiaomi but the success of this is no longer priced into the shares in my opinion.
• Since the IPO, Xiaomi has lost just over half its value and its market capitalisation is now $27.9bn.
• Xiaomi is now trading on 0.9x 2019 EV / Sales and is growing at profits at more than 20% through steady improvement in its historically poor profitability.
• Hence, I no longer think that the shares are overvalued and that there is no money to be made by being short.
• However, to see a real recovery in the valuation, Xiaomi needs to begin to properly monetise its 291m MaU which is going to be a challenge.
• When I can see how this will be achieved, I will be inclined to take a position in Xiaomi, but I am on side-lines for now.