Xiaomi’s $120 billion gain faces scrutiny on smartphone slowdown

Xiaomi’s China market share did expand to 15.7% in the second quarter from 14.7% a year earlier, but it was helped by price reductions on popular models, according to Counterpoint Research

Investors anxiously await an earnings report from Xiaomi Corp., following a rally that has driven its market value up $120 billion in the past year on excitement over its push into electric vehicles.

Concerns are growing over the Chinese technology company’s core smartphone operation, which is expected to post a major slowdown in growth and narrower margins in quarterly results due later Tuesday. Xiaomi may also face questions over its EV business, where capacity issues have constrained its ability to keep up with strong demand.

Even after losing some steam, the stock is trading at more expensive valuations than domestic EV peers like BYD Co. as well as global smartphone rival Samsung Electronics Co. At the same time, bearish bets on Xiaomi have been creeping higher.

“Xiaomi’s smartphone business may be under more strain than expected” amid higher chip costs and aggressive pricing by other makers, said Edison Lee, analyst at Jefferies Hong Kong Ltd. “I’d definitely want management to comment on the second-half outlook for smartphones — specifically regarding average sales prices and margins.”

As in virtually every other major China tech arena, competition has been ratcheting up in the nation’s smartphone market amid sluggish consumer spending. Xiaomi along with rivals Apple Inc. and Huawei Technologies Co. offered steep discounts over the big June shopping festival in an attempt to lure shoppers, raising concerns over the impact on earnings.

Xiaomi’s China market share did expand to 15.7% in the second quarter from 14.7% a year earlier, but it was helped by price reductions on popular models, according to Counterpoint Research. That ranked it No. 4 behind Huawei, Vivo and Oppo. The landscape is even more challenging in India, where Xiaomi’s market share shrank to 8% from 13% by shipment volume in the June quarter, according to the research firm.

Smartphone unit sales at Xiaomi “are unlikely to see meaningful upside given muted China demand post consumption subsidies and weaker momentum in overseas markets,” JPMorgan Chase & Co. analysts including Gokul Hariharan wrote in a note last week. “Coupled with rising component costs, the smartphone segment’s gross margin is expected to remain under pressure.”

Analysts estimate the company’s smartphone revenue rose 3.9% from a year earlier in the June quarter, the slowest growth since 2023. That business still account for more than 40% of Xiaomi’s total revenue, though the share has declined as the EV operation expands.

With the lowered expectations for smartphones, Xiaomi’s shares are down 12% from their record high in early July, making it the worst performer on the Hang Seng Tech Index in that span. Hopes are still high for its EV business, though it’s still experiencing some growth pains.

“We are upbeat on its electric vehicle growth trajectory, underpinned by robust consumer interest — evidenced by prolonged delivery lead times for its models,” notes June Lui, a portfolio manager at Polen Capital. “The slowdown in smartphone demand is an industrywide trend, not unique to Xiaomi,” she added.

There are some signs of investor squeamishness, with short interest climbing back to over 0.7% of the free float from around 0.4% in late July, according to S&P Global data. The stock has also gotten more expensive, trading at an average of 27 times estimated forward earnings over the past year, in line with Apple’s three-year average.

“After being a leading outperformer in the HK market, we see some headwinds in the coming quarters — smartphone shipments may have downside risks to market expectations,” Nomura Holdings Inc. analysts including Donnie Teng wrote in a note this month, downgrading the stock to neutral. “Most positives are likely already priced into the shares.”