How Xiaomi Could Justify An $80 Billion Valuation

Chinese budget smartphone and consumer electronics vendor Xiaomi is expected go public during the second half of 2018, in what is likely to be one of the most high-profile IPOs of the year. Although there have been reports that the company could seek a valuation between $80 billion and $100 billion, as it tries to sell itself as an Internet/ecosystem company, we estimate the company will be valued at below $50 billion, considering its relatively undeveloped ecosystem, low brand loyalty and pricing power, as well as the intense competition in the lower end of the smartphone market (see our stance here). However, in this note, we take a look at an upside scenario which could see the company justify a valuation of about $80 billion based on stronger ASPs, shipments, and margins in 2018.

We have also created an interactive analysis that allows users to arrive at their own price estimate for Xiaomi, using the various inputs such as volumes, ASPs, and net profits. Our upside scenario is shown in blue.

Higher Shipments, Average Selling Prices

Our upside scenario assumes that the company will be able to see stronger growth in markets such as India and Southeast Asia, boosting its shipments to levels of about 115 million in 2018, up from our base case of 105 million units. The scenario also assumes that the company sees stronger than expected ASP growth, with price realizations rising to levels of $175 per smartphone sold, versus our base case of $160 per unit, driven by a stronger mix of more premium products such as Note Pro and Mi Mix 2 and potential expansion into more developed markets.

Stronger Services Revenue Growth

Our upside scenario estimates that Xiaomi is likely to see stronger growth of its other product and services revenues ($5 billion versus our base case estimate of $4 billion), driven by higher app and ad sales as well as the expansion of its other product lines such as TVs and consumer electronics beyond the Chinese market.

Higher Net Profit Margin, Earnings Multiple 

Our upside case also assumes that Xiaomi’s net margins will come in at 13%, versus our base case of 10%, driven by the higher ASPs, services revenues and a potential softening of memory prices, which have impacted the margins of most smartphone manufacturers over 2017.

Our upside scenario also assumes that the company’s valuation multiple will stand at 25x, versus our base-case multiple of 20x, driven by the higher growth prospects and margins.