Is Xiaomi Really Worth $50 Billion?

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Xiaomi Corp., the Chinese smartphone maker founded four years ago, is trying to raise funds at a valuation higher than any publicly traded personal-computer or mobile-phone maker, including Apple Inc. and Lenovo Group Ltd.

Xiaomi is in talks for a funding round that would value the Beijing-based company at $40 billion to $50 billion, people familiar with the matter have said. The talks are at an early stage and nothing is finalized, they said.

That would give closely-held Xiaomi a higher valuation as a multiple of sales than competitors including Lenovo and Sony Corp. It would be a wager that Xiaomi can continue its rapid growth after tripling sales in the most recent quarter to become the third-largest smartphone maker in the world behind Samsung Electronics Co. and Apple.

“If Xiaomi can replicate its success in China in other markets, as well as its success in mobile phones to other product categories, then it may justify the valuation,” said Sandy Shen, a Shanghai-based analyst with Gartner Inc.

Joy Han, a Beijing-based spokeswoman for Xiaomi, declined to comment yesterday on the company’s fundraising plans or valuation.

Shares of Apple fell 0.7 percent yesterday in New York, while Samsung declined this morning in Asia. Sharp Corp., which makes displays for Xiaomi phones, rose 3.2 percent today in Tokyo trading.

Apple Ratio

Xiaomi revenue is set to more than double this year to exceed $12 billion, estimates Neil Shah, Mumbai-based research director for devices at Counterpoint Research. A $50 billion valuation would be 4.2 times Shah’s forecast for Xiaomi’s sales this year.

Apple sales are forecast to rise 15 percent to $209.4 billion this year, according to the average of 46 analysts in a Bloomberg survey. That puts Apple’s current market capitalization of $637 billion at about 3 times projected sales.

Lenovo’s price-to-sales ratio is .38, while Sony’s is .30, according to data compiled by Bloomberg. Samsung, also the world’s biggest maker of televisions and memory chips, has a ratio of .70.

“Future expectations weigh quite a lot in the valuation, so it seems the investors are betting on a huge future for Xiaomi,” said Jessica Kwee, a Singapore-based analyst with researcher Canalys.

‘Questionable’ Valuation

Investors may be willing to take that chance because of Xiaomi’s track record. Founder and Chief Executive Officer Lei Jun used a combination of high-end features, low prices and tailored services to win sales in China. The company overtook Samsung to become the largest smartphone vendor in its home market in the second quarter, according to Canalys.

Xiaomi doesn’t make its own devices and relies on contract manufacturers, including FIH Mobile Ltd. and Inventec Corp., to build them. The company also sells to consumers from its website to keep costs down.

Xiaomi’s marquee Mi 4 starts from 1,999 yuan ($327) on its China website. That’s about a third of the starting price for Apple’s iPhone 6 in China.

Lei is taking his business model overseas to 10 countries in a push to sell 100 million phones next year. Xiaomi hired Hugo Barra, a former Google vice president who had helped oversee Android product management, to lead that push.

Brazil, Russia

“I’m more interested to see the returns on that market share,” said Jack Narcotta, a Hampton, New Hampshire-based analyst with Technology Business Research. “If the operating margins for Xiaomi begin to approach mid-single digits, that’s a business that’s primed for a good run.”

Such a high valuation may be “questionable” because Xiaomi’s international efforts are nascent, said Sam Park, a professor of strategy at China Europe International Business School in Beijing. Competitors such as Sony and Lenovo have earned their management expertise over decades, and it isn’t clear whether Xiaomi is prepared for international success only three years after introducing its first smartphone, he said.

“All the challenges begin from here,” Park said. “Xiaomi must show it has the ability to sustain this new leadership position into the future.”

Xiaomi more than tripled global smartphone shipments to 17.3 million units in the third quarter, from 5.6 million a year earlier, International Data Corp. reported Oct. 29. Its market share more than doubled to 5.3 percent from 2.1 percent, trailing only Samsung and Apple.

Still, for Xiaomi to be worth the $40 billion to $50 billion valuation, the company will have to figure out how to convert sales of low-margin devices into sales of high-margin software and services, Shah said.

The company is branching out into tablet computers and Internet-ready televisions. Growth in those businesses and new markets India, Brazil and Russia can help support the valuation, said James Roy, a Shanghai-based analyst at China Market Research Group.

“They’ve got a very strong position in markets that are largest by number of consumers and that are also growing the fastest,” he said.