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Is Xiaomi’s Valuation Overpriced?

Published 05/09/2018, 11:14 AM
Updated 07/09/2023, 06:31 AM

Recent news that Xiaomi (HK:XMGP) would be making its market debut has ignited a plague of IPO fever amongst investors, with news of the company’s foraying into the market quickly spreading around the globe. Many immediately took the news that the Chinese smartphone behemoth would be going public and ran rampant with it, spreading rumors that it could be worth as much as $100 billion. Few people seem willing to question this valuation, and Xiaomi’s prospects are looking better in the media headlines by the day.

As we’ll come to see, however, Xiaomi’s valuation is likely overpriced, and while the smartphone giant is worth a pretty penny, investor would be wise to do their homework before blindly throwing their money behind it.

A Truly Massive Ipo

When it became apparent that Xiaomi would be making its market debut in Hong Kong, the company was initially hesitant to issue public comments, and didn’t make any grand spectacle as it pertains to its valuation. Confidential sources soon spilled to disparate media sources that the Chinese tech company could be looking to score as much as $100 billion from its IPO, however, and that news spread like wildfire around a market that’s hungry for more tech-based IPOs. It’s been a stellar year for tech IPOs, after all, so it’s perfectly reasonable the market would react with glee to the news about Xiaomi’s IPO.

Too many investors have started to count their eggs before they’ve hatched, however, in a move that could bring them financial ruin and woe later on down the line. After all, while no one doubts that Xiaomi is a true behemoth on the Chinese tech scene, that doesn’t necessitate that the company is worthy of the truly awesome valuation that it’s been publicly pegged at by speculators. Once upon a time, the company was valued at $45 billion, so the mammoth leap it’s made in the meantime has many believing that news about Xiaomi’s forthcoming IPO could be far too good to be true.

The peculiar tech company has made an interesting run of things, and having established itself as probably the most powerful smartphone manufacturer in China, it’s not likely to run into financial ruin anytime soon. The changing nature of the country’s middle class alone spells out huge fortunes for the company; as untold millions of Chinese citizens ascend the financial ladder into wealth, they’ll be wanting the latest gadgets, and for that they’ll turn to Xiaomi. Before investors, like The Bankly, get ahead of themselves, however, it’s worth taking a look into the company’s closet to see if it’s attempting to hide any skeletons that might sour its market debut.

According to filings the company made with the government of Hong Kong, the company will be capping its net profit margin at 5 percent, for instance, in an effort to invest more in its future capacities. Xiaomi’s filings also make it clear that the company has a history of losses in its past, though continued growth in the amount of smartphone shipments its sending out could prove instrumental towards boosting revenue streams in the future.

Competing with American tech giants

For Xiaomi’s smartphone empire to escape from China’s economic gravity and become a true staple of global tech markets, the company will need to go toe to toe with tech giants like Samsung (KS:005930) and Apple. While Xiaomi’s CEO has often been labeled the “Steve Jobs of China,” it doesn’t necessarily follow that the company has the reach of the consumer-beloved Apple Inc (NASDAQ:AAPL).; after all, Xiaomi doesn’t ship nearly as many smartphones as its greatest American counterparts do.

Astute reporting from the Wall Street Journal shows just how seriously outplayed Xiaomi is when it comes to sending out large shipments of smartphones; the company’s global smartphone shipments for the quarter ended March, 2018 were a mere 28 million, dwarfed by Samsung’s 78.2 million and Apple’s 52.2 million. As long as Xiaomi lags behind these truly immense tech behemoths, it will struggle to ever reach such a mammoth valuation of $100 billion.

That doesn’t mean that the smartphone company is doomed to irrelevance when compared to its western peers, however; a growing middle class in China will doubtlessly continue to lead to an explosion in smartphone sales, so expect Xiaomi’s global shipments to gradually tick upwards. As the company expands its presence elsewhere in Asia, too, it’s prospects will glow. Nonetheless, Xiaomi is almost certainly overpriced, as the company lacks the strength and capacities of a $100 billion company, and investors shouldn’t deceive themselves. The allure of a tech IPO can be great, and Xiaomi is likely to have the largest Chinese tech IPO since Alibaba (NYSE:BABA) made its debut. Before potential shareholders throw their weight behind Xiaomi, however, they should be aware that the company’s speculated $100 billion IPO could be vastly overpriced if investors aren’t careful from the get-go.

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