Market Saturation And Soaring Costs Will Impair Profitability

Key Takeaways

• Smartphone market saturation, intensifying competition, and low-margin reliance threaten Xiaomi's revenue growth and long-term profitability.
  
• Regulatory scrutiny, geopolitical tensions, and rising research costs risk derailing international expansion and eroding cost stability.
  
• International expansion, integrated ecosystem, premium tech innovation, and a strong EV business together drive brand strength, margin sustainability, and diversified long-term growth.

Catalysts

An investment holding company, engages in the development and sales of smartphones in Mainland China and internationally.

• Smartphone market saturation and lengthening replacement cycles worldwide are expected to severely constrain unit sales growth, intensifying price competition and putting downward pressure on Xiaomi's revenue growth and gross margins over the long term.
  
• Increasing global regulatory scrutiny and tightening trade restrictions targeting Chinese technology firms threaten to undermine Xiaomi's international expansion, potentially stagnating revenue growth from key overseas markets and reducing market diversification.
  
• The relentless rise in research and development expenditures-up more than 40% year-over-year in the latest quarter-is likely to continue as Xiaomi attempts to keep pace with technological advancements, disproportionately weighing on future net margins and sustaining elevated operating expenses.
  
• Xiaomi's persistent reliance on low-margin hardware, particularly in the smartphone segment where premium market penetration still trails far behind Apple and Samsung, exposes the company to ongoing margin compression and limits the scalability of its higher-margin services and ecosystem revenues.
  
• Supply chain vulnerabilities heightened by rising geopolitical tensions and potential climate-related disruptions could lead to further component shortages and unpredictable cost fluctuations, impairing Xiaomi's ability to maintain scale and effectively protect profitability in its core device categories.

Xiaomi Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Xiaomi compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Xiaomi's revenue will grow by 16.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.7% today to 7.6% in 3 years time.
• The bearish analysts expect earnings to reach CN¥50.9 billion (and earnings per share of CN¥1.99) by about August 2028, up from CN¥37.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, down from 33.8x today. This future PE is about the same as the current PE for the HK Tech industry at 33.1x.
• Analysts expect the number of shares outstanding to grow by 4.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Xiaomi Future Earnings Per Share Growth

Risks

• Xiaomi's rapid international expansion, especially into Europe, Latin America, and Africa, is already translating into accelerating market share gains and diversified revenue streams, which could help sustain total revenue growth and buffer against China-specific economic risks.
  
• Ecosystem stickiness is on the rise as Xiaomi integrates AIoT devices, premium smartphones, and EVs into a unified platform, enhancing user retention and unlocking recurring service income, with increasing gross margins in both IoT and Internet services segments supportive of sustained improvements in net profit margin.
  
• Heavy investment in R&D and AI capabilities is resulting in proprietary products-including self-developed 3nm processors, AI glasses, and multimodal AI models-driving premiumization, brand perception, and higher average selling prices for devices, all of which may contribute to improved gross margin and earnings quality over time.
  
• Xiaomi's smart EV business is exhibiting strong momentum with high ASPs and industry-leading gross margins for the segment (over 26%), while economies of scale and platform standardization could continue to support profitability and operating leverage, offering long-term EPS growth potential as EV deliveries increase.
  
• The robust growth in connected device ecosystem (IoT, wearables, tablets, and home appliances) combined with successful channel and retail expansion in both domestic and overseas markets signals significant runway for volume and ASP growth, which could propel sustained increases in total revenue and support gross and operating margin resilience.

Valuation

• The assumed bearish price target for Xiaomi is HK$48.76, which represents two standard deviations below the consensus price target of HK$66.6. This valuation is based on what can be assumed as the expectations of Xiaomi's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$80.21, and the most bearish reporting a price target of just HK$36.09.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥671.5 billion, earnings will come to CN¥50.9 billion, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of HK$52.55, the bearish analyst price target of HK$48.76 is 7.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.