• Bloomberg


Xiaomi Corp. raised $5.4 billion by selling investors on its promise as a high-growth internet company. Some are starting to lose faith.

The Beijing-based purveyor of mostly cheap smartphones has sunk 19 percent from its peak after its initial public offering despite a spate of positive ratings — mostly from the same banks and outfits that sponsored its coming-out party. On Wednesday, Xiaomi reports earnings for the first time as a public company, offering a close-up of two of its most important initiatives: an international expansion and its evolution beyond hardware and into online services from music to video, a la Apple Inc.

Lei Jun, Xiaomi’s billionaire co-founder, has consistently pushed the internet-giant narrative. That helped the company price its IPO at multiples far higher than celebrated tech names such as Tencent Holdings and Facebook Inc. But even then the market balked, and the company ended up valued at around half the $100 billion price tag touted just months prior. Analysts preach caution at a time investors are fleeing tech stocks, spooked by trade tensions and a backlash against the industry’s outsized clout. The stock was largely unchanged Wednesday, hovering barely above its IPO price.

“We don’t think it’s worth a pure internet company because it’s not the same as Alibaba or Baidu or Amazon. They can only get a new subscriber by selling a smartphone,” said Mark Newman, an analyst with Sanford C. Bernstein who said investors he’d spoken to harbored mixed to negative views. “I like the business model, I think it is good. The problem is just what it’s worth.”

By any measure, Xiaomi’s come a long way since 2016, when growth flatlined and Lei penned a heartfelt missive to rally his troops.

Now, the 10 of 16 analysts plugging the stock advise investors to again look beyond transient hiccups. Xiaomi’s busy building stores that will serve as beachheads for expansion into emerging markets like India and Russia. Its estimated 190 million monthly active users are a rich pool of buyers for high-margin services. That base should grow as Xiaomi pushes gadgets to users for what it calls “honest prices.” As Goldman Sachs analysts led by Piyush Mubayi put it, it’s “building a mountain one grain at a time.”

“The internet services growth is highly related to their smartphone sales, especially in China,” said Elinor Leung, CLSA’s head of Asian telecoms and internet research. “The good thing is that we’re still seeing good momentum in China although the shipment number is not going up a lot.”

But to the five analysts who rate Xiaomi a hold, the company faces no shortage of challenges, particularly in the smartphone business that yields 70 percent of its revenue.

Local rivals are directing precision attacks against the company overseas, a key area for growth given a saturated Chinese market. Oppo Co. created the Realme brand for India, selling budget phones online to try and topple Xiaomi from its leading position. At the other end of the spectrum, Huawei Technologies Co. is shifting its focus back to Europe, a critical market for Xiaomi’s more expensive devices.

“Xiaomi is expensive in the short term no matter what,” said James Wei, an analyst with Yuanta Securities. “Xiaomi needs to restructure its businesses over the next year, because China is saturated. Readjustments will be unavoidable so we need to be relatively cautious.”

Even if Xiaomi fends off its rivals, the real battle revolves around growing services income — its main source of profit. While it has made advances in China with its own video, music and finance apps, those businesses barely exist elsewhere. Its ecosystem partners — the ones that make everything from air purifiers to toy robots — are mostly domestically oriented. Global smartphone demand itself is on the wane, threatening the device sales that Xiaomi depends on to grow and engage its user base.

“The overseas smartphone business is the key driver for growth. But many headwinds are expected, such as resistance from local governments and competition from other brands,” said Fu Tianzi, an Everbright Securities analyst with the lone sell rating on Xiaomi. “In areas like self-operated gaming and content creation, the company still lags behind.”

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