CELLPHONES: Xiaomi Wins 2014 Honors With Big Valuation

Bottom line: Xiaomi’s success story is likely to continue into 2015 with big growth for its core smartphones, but it could face headwinds with other smart devices that are based on less mature technologies.

Xiaomi: China’s tech company of the year

I’ll end this year by naming Xiaomi as my “Top Company Of 2014”, following a flurry of year-end headlines that show just how quickly this marketing-savvy firm has shot to fame on its trendy, low-cost smartphones. Leading the headlines is word that Xiaomi has raised $1.1 billion in its latest funding round, valuing the company at a hefty $45 billion. (Chinese article) Xiaomi is also in a flurry of other headlines that I’ll recap shortly, leading me to declare this hyperactive company has officially unseated former champion Alibaba (NYSE: BABA) as China’s most publicity savvy high-tech name.

Xiaomi will undoubtedly like the comparison to Alibaba, whose own valuation has soared over the last 3 years, making it China’s most valuable Internet firm now worth $260 billion after its record-breaking IPO in September. Before that IPO, I repeatedly said that forecasts of Alibaba’s valuation were overstated and its constant appearance in the headlines would ultimately cause people to lose interest in the company.

Obviously I was wrong on both counts, and Xiaomi is clearly hoping to follow the highly successful path that Alibaba has carved out for start-up Chinese tech firms. The headlines have been mostly positive about Xiaomi this past year, as sales for its core smartphones soared and it embarked on a major global expansion. But it also ran into the inevitable headwinds, facing legal and regulatory obstacles in important markets like India and Taiwan.

All that said, let’s look at the latest headlines that had Xiaomi and its backers in a talkative mood after the company’s latest mega funding. Leading the cheerleaders was outspoken billionaire Russian tech investor Yuri Milner, head of Digital Sky Technologies (DST), who predicted that Xiaomi’s valuation could soon more than double to $100 billion. (English article)

Milner made similar headlines in 2011, when he invested in Chinese e-commerce firm JD.com (Nasdaq: JD) and said the young company could be worth $10 billion. JD went on to make an IPO this year, and now has a market value of about $32 billion — meaning the $10 billion valuation was probably a bit overstated but not too far from accurate. Of course it’s also important to note that Chinese tech company valuations have soared in the last 2 years to frothy levels, and it’s quite likely we could see a big correction in the next year or 2.

Another media report points out that Xiaomi’s valuation has soared by 180 times over the last 4 years, as its sales have also soared and it tries to realize its dream of building a broader ecosystem of products and services that allow smart devices and their owners to communicate with each other. Some of those products include Internet TVs and routers, which have yet to gain much traction.

Xiaomi entered the field of smart household devices this month when it launched a line of air purifiers, though it was quickly accused of copying its product design from a Japanese company. In one of the latest year-end headlines, media are saying Xiaomi is also preparing to launch a new line of water purifiers, catering to a growing number of Chinese worried about the country’s well-documented pollution problems. (English article)

News of this new product line comes from another one of Xiaomi’s early investors, GGV Capital, which has probably made quite a nice profit from its investment. News of yet another new product line looks quite incremental and in line with Xiaomi’s broader strategy, and I expect we’ll see more similar announcements in the year ahead. Success in smartphones has been relatively easy for Xiaomi due to the maturity of the technologies involved, but it could face more headwinds in many of its new product areas it enters due to the lack of proven and mature technologies in most of those areas.

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