Chinese smartphone giant Xiaomi was valued at $46 billion after its most recent round of funding in late 2014, making it the most valuable start-up in the world. That makes it much bigger than Sony (NYSE:SNE), which has an enterprise value of $31 billion. Xiaomi and Sony now compete in many areas, including mobile devices, wearables, TVs, and smart appliances.
But investors might be wondering if Xiaomi, which was founded just six years ago, should really be worth more than Sony, one of the most well-known brands in the world. Let's take a closer look at Xiaomi's growth to decide.
How fast is Xiaomi growing?
In late 2014, Xiaomi founder Lei Jun claimed that the company's annual sales would rise 35% to 100 billion yuan ($16 billion at the time) in 2015. Unfortunately, sluggish demand for smartphones in China and intense competition from domestic rivals throttled Xiaomi's growth, and sales rose just 5% to 78 billion yuan ($12.5 billion). With the devaluation of the yuan factored in, sales only improved 3% in U.S. dollars.
Xiaomi originally thought it could sell at least 80 million smartphones in 2015. It ended up selling just over 70 million, which left it trailing Huawei, which sold 100 million. By comparison, Apple (NASDAQ:AAPL) and Samsung respectively sold 231 million and 325 million smartphones last year. Xiaomi also planned to generate $1 billion in Internet services revenue last year to pivot away from smartphones, but it didn't provide an update along with its 2015 sales figures, suggesting that it missed its target.
Xiaomi doesn't regularly disclose its profitability, but a 2013 filing revealed that it had an operating margin of just 1.8%, since it sells its products at much lower prices than its "brand name" rivals. Xiaomi cuts costs by selling its products online, using social networking campaigns instead of paid ads, and releasing products in limited quantities to boost demand and keep inventories low.
A mature tech company or a thriving start-up?
Xiaomi's slow sales growth and thin margins make it look more like a mature tech company than an exciting start-up. By comparison, Sony's revenue fell 1.3% to $71.7 billion in fiscal 2015, and it had an operating margin of 3.6%. That gives Sony a fairly low EV/Sales ratio of 0.4.
Comparing a start-up to a publicly traded company can be tough, since a start-up's valuation only changes when new investments are made, and its earnings growth is usually obfuscated like Xiaomi's is. But assuming that Xiaomi's $46 billion valuation is roughly equivalent to its EV, its 2015 revenue would give it an EV/Sales ratio of 3.7. That's not cheap by tech industry standards -- Apple currently has an EV/Sales ratio of 2.4, and Samsung has an EV/Sales ratio of 0.6.
So how much should Xiaomi be worth?
If Xiaomi were valued more like Apple, which posted 28% sales growth in 2015, it would have an enterprise value of about $32.5 billion. But if Xiaomi were valued closer to Sony or Samsung, which didn't post robust sales growth in 2015, it would have a "fair" enterprise value between just $5 billion and $7.5 billion.
Xiaomi hasn't offered any new sales forecasts for 2016, but research firm IHS claims that the company's smartphone shipments fell about 1% year-over-year to 14.8 million in the first quarter of 2016. If that trend continues, and Xiaomi's other products fail to generate enough revenue to offset those declines, the company could be headed for a year-over-year sales decline similar to the one Sony experienced in 2015. Since Xiaomi is likely still selling products at lower margins than Sony, that decline might cause the company to become unprofitable.
The verdict: Xiaomi is probably overvalued
In 2014, when Xiaomi hit its $46 billion valuation, its sales rose 135%. If sales had kept soaring on that triple-digit trajectory in 2015 and 2016, its $46 billion valuation could be easily justified. However, 5% sales growth in 2015 and potentially negative growth this year indicate that the world's most valuable start-up has already become a mature tech company. That's why it probably shouldn't be worth $15 billion more than Sony.