What Is Xiaomi Really Worth? An Interactive Analysis

by Trefis Team
Rate   |   votes   |   Share

Chinese smartphone and consumer electronics vendor Xiaomi is expected to go public during the second half of 2018, potentially raising over $10 billion in what is likely to be one of the most high-profile IPOs this year. The excitement surrounding the IPO is understandable, given the growing investor interest in China’s technology market, which has seen tech titans such as Alibaba and Tencent deliver returns of close to 100% each over the past year. Xiaomi’s performance over 2017 was also strong, with the company posting 50% year-over-year shipments growth, as it revamped its sales and marketing model while pushing into the fast-growing Indian market. Although there have been reports that Xiaomi 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’s value at closer to $50 billion, considering its relatively undeveloped ecosystem, and somewhat low brand loyalty and pricing power, as well as the intense competition in the lower end of the smartphone market. In this note, we provide an outline of the company’s valuation based on our forecasts for its near term financial results.

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.

Xiaomi’s smartphone shipments are estimated to have grown to over 90 million in 2017, driven by growth in emerging markets such as India. We expect shipments and ASPs to rise in 2018, driven by new launches and slightly more premium products such as Note Pro and Mi Mix 2.

Xiaomi sells a range of devices, from smartphones to rice cookers and air purifiers, and the company is also likely to have a growing Services revenue stream from its app store and browser, which generate revenue from games and advertising. The company should see other revenues expand over 2018 as well, as it expands its consumer electronics business beyond the Chinese market.

Xiaomi is estimated to have posted net profits of over $1 billion in 2017, and its net profits are expected to approach $2 billion in 2018, driven by higher economies of scale and more premium products. However, the company’s relative lack of proprietary technologies (unlike high-end rivals Apple and Samsung) could hinder margin expansion in the long run.

While Xiaomi is likely to target an Internet company-like valuation multiple (~40x for Tencent, ~30x for Alibaba), talking up its services business and device ecosystem, we don’t believe that is justified in the near term for several reasons. Firstly, the low-to-medium end of the smartphone market where Xiaomi competes sees fairly low levels of customer loyalty, and customers typically migrate to the brand which offers the best price/value, implying that pricing power is also very low. Moreover, Xiaomi’s services ecosystem is currently quite limited, and its services user base is unlikely to be as large or sticky as those of the Chinese Internet giants. The company’s services revenues primarily come from the sale of games, media and some advertising. However, we believe that the company could justify a valuation multiple of about 20x, which is ahead of the likes of Apple (16x forward earnings), considering its higher growth prospects. The company is gaining share in emerging markets such as India, and it also has plans to expand into developed markets such as the U.S.

Sources:

Xiaomi Smartphone Shipments

2015: IDC

2016 & 2017: Counterpoint Research

Xiaomi Smartphone Average Selling Price

2015: Mobile World Live

2016 & 2017: Trefis Estimates

Xiaomi Total Revenue

2015: Fortune

2016: Trefis Estimate

2017: Company estimated $17 to $18 billion, per Reuters

Net Profits:

2017: Reuters

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!