Xiaomi – Reality Check pt. IV

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Xiaomi’s trajectory falls far short of $46bn.

• Q4 15A appears to have brought Xiaomi no relief from stagnation as it seems to have missed the low end of its 80-100m forecast.
• The exact figure for 2015A is not yet clear but RFM has been forecasting for some time that Xiaomi would ship 76m devices in 2015A.
• This assumes an increase in market share to 5.8% in Q4 15 compared to 5.0% in Q3 15.
• Given that market share has been stagnant around 5% for the last six months and there has been very little to drive it higher, Xiaomi’s 2015 shipments could have been as low as 72m.
• Even 76m represents YoY growth of 25% in shipments and I suspect far less in terms of revenues as Xiaomi’s ASPs have been trending downwards for the last few quarters.
• Using the lower estimate of 72m units and 10% price erosion for 2015, Xiaomi’s revenue growth could have been less than 10% in 2015.
• While this is not necessarily a problem for the company per se, it is a huge problem for the valuation of the shares and Xiaomi’s ability to raise capital.
• I have long argued that Xiaomi has ground to halt because there is only so much volume that can be sold through the Internet (see here).
• This has been compounded by competitors catching on and mimicking its style meaning that it no longer really stands out from the crowd.
• This is why the ecosystem is so important.
• By developing its own ecosystem, Xiaomi will have something that no one else can copy and I still think that this is the only route that Xiaomi has to reaching substantially better profitability.
• Unfortunately, Xiaomi’s ecosystem is at a very early stage with just 25% of the Digital Life pie covered.
• To have a fully-fledged ecosystem, Xiaomi needs to develop or acquire more services such that users are keen to spend more of their Digital Lives with Xiaomi.
• This requires money, which with no real internal cash generation and difficulty in raising capital, will be very hard to come by.
• Its Android competitors (Samsung and Huawei) and its ecosystem competitors (Baidu, Tencent and Alibaba) all have strong internal cash flow giving them the ability to invest.
• Xiaomi is seen as the Apple of China and consequently, its valuation has been determined based on Apple’s revenues.
• I have long argued that this is deeply flawed as Apple has huge margins and Xiaomi does not.
• Consequently, a comparison based on operating profit is far more appropriate.
• With growth now stagnant, it is now impossible to justify a premium to Apple.
• I have used this logic to value Xiaomi at $5.9bn (see here) but the fall in Apple’s share price and Xiaomi’s worsening performance Q4 15 are now pointing to an even lower figure.
• Xiaomi could easily be more than 10x overvalued at $46bn
• It has never been more important for Xiaomi to develop its ecosystem but without access to capital, I suspect that this is going to be extremely difficult.
• A very tough year beckons.