IPOs: Xiaomi Growth Charms, Losses Alarm
Bottom line: Xiaomi is hoping to attract investors to its IPO through its recent strong revenue growth, but it could still be years before it becomes profitable due to heavy reliance on low-end, low-margin products.
Everyone is fawning over the newly released IPO prospectus from Xiaomi, the smartphone maker that is aiming to make what’s likely to be the biggest listing of all time by a company from its class. Most eyes seem to be focused on the company’s top line, headlined by revenue that grew 67.5 percent last year. But from my perspective, the picture isn’t all that attractive due to the company’s huge loss, along with data that show it is clearly stuck at the lower end of the global smartphone market in terms of brand positioning.
None of that is necessarily that bad, since Xiaomi, whose upcoming Hong Kong IPO is likely to be one of this year’s largest, is clearly in an early stage of its development. Most major brands today didn’t start out as premium names. Classic cases in that category are the Japanese and Korean electronics makers, most of which started off as makers of low-end but relatively reliable cheap products that made the “made in Japan” label at one time the equivalent of the “made in China” label now.
All that said, let’s zero in on Xiaomi’s newly released prospectus, which shows the company’s revenue grew 67.5 percent last year to 114.6 billion ($18.2 billion). (English article) That figure is actually probably somewhat understated, since the company’s current comeback, following a two-year downturn, didn’t really begin to take shape until the second half of the year.
Its smartphone shipments actually nearly doubled in the fourth quarter of last year, which leads me to suspect the company’s revenue probably made similar gains for that period, even though it didn’t break out such quarterly data. The gains do seem to be moderating, however, though Xiaomi’s smartphone shipments were still up a healthy 88 percent in the first quarter of this year. Thus it’s likely the company should still be able to post revenue growth of 50 percent or higher this year, which certainly isn’t bad.
But underlying the strong top-line growth was a huge loss on the bottom line, at 44 billion yuan, to be precise. Put differently, that means that the company’s loss was about 40 percent of its total revenue, which is quite a high figure considering Xiaomi is now a relatively mature company at the age of eight, even though it didn’t release its first models until 2012.
The other worrisome fact is average selling price, which was around 880 yuan per phone, or around $140. That puts Xiaomi squarely at the lower end of the market. That meshes with information from my smartphone sources who tell me the big majority of the company’s sales come from its Redmi line of cheap smartphones. A quick Google of the models reveals that they do, indeed, generally sell in the $120-$140 range.
On the more positive side, Xiaomi has pointed out, and emphasized extensively through its prospectus, that it has been one of China’s most successful high-tech brands in terms of globalization. The company currently sells its models in 74 countries and regions worldwide, and is in the top 5 brands in 15 of those. Xiaomi loves to point to India as its biggest success story, where it surpassed Samsung (Seoul: 005930) to become the market’s best-selling brand at the end of last year, at least in terms of unit sales.
So at least at this point in time, anyone thinking of buying into Xiaomi is probably going to buy a piece of a relatively fast-growing company with razor-thin margins and a developing market focus for at least the next few years. I seriously doubt the company will be able to climb from the loss column for at least the next 2-3 years, though that fact never seemed to bother investors in companies like Amazon (Nasdaq: AMZN) and Tesla (Nasdaq: TSLA).
To become a serious player over the longer term, meaning highly profitable, Xiaomi will eventually have to make the transition to higher-end products, which typically carry much fatter profit margins. The problem is, this industry is an extremely fast-moving one where you’re only as good as your latest product, and one where superstars like Nokia and Motorola can become yesterday’s news in just two or three years.
That means the chances that Xiaomi will still be around and a significant player in 7 or 8 years aren’t all that big. The main reason for buying the stock would be in anticipation of that future date when the company might be a major seller of high-end phones. Thus if I was a bettor, I would probably take a pass on the stock for at least the next couple of years until it becomes clearer whether this company has that kind of staying power.