Please ensure Javascript is enabled for purposes of website accessibility

Are Xiaomi Shares a Buy Right Now for Investors?

By Motley Fool Staff - Updated Oct 29, 2019 at 8:44AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's why smartphone giant Xiaomi Corp's shares may be worth a look.

While Xiaomi Corp's (1810 -4.13%) phones may be popular, the same cannot be said about its stock. The smartphone giant's stock has shed close to 50% of its value since it went public in Hong Kong last year. But the steep fall in its share price may have given investors a good entry point to get into this high-growth company for the long term.

Family looking at smartphones.

Image Source: Getty Images.

Growing its smartphone business

Xiaomi has recently been able to win market share in the smartphone category against some of its more illustrious competitors. According to a report by Canalys, Xiaomi's global market share has grown from 9.5% in the second quarter of 2018 to 9.7% in the second quarter of 2019.

Most notably, the group made big strides in Western Europe where its market share increased from 3.5% to 5.5%. It managed to win market share against Apple and Huawei, both of which saw their market shares in Western Europe decline by 2.8 and 5.3 percentage points respectively.

Xiaomi can also ride on the potential boost in domestic demand for smartphones, which will be driven by the commercialization of 5G technology. Xiaomi established a research and development team focusing on 5G technology back in 2016 and is well-prepared for the 5G smartphone replacement cycle.

The recent increase in smartphone sales has translated into its financials. In the first half of 2019, revenue from smartphones surged 9.8%.

Other segments growing too

Besides its smartphone business, the group's two other segments – (1) Internet of Things (IoT) and lifestyle products and (2) internet services have both seen rapid growth.

In the first six months of the year, revenue from its IoT and lifestyle segment jumped 49.3%, while internet services revenue increased by 22.9%.

The two fast-growing segments, which accounted for 37% of Xiaomi's total revenue, are becoming an increasingly important growth driver for the company.

Turning a profit

Investors have had a hard time grappling with Xiaomi's business model – to be the most cost-effective smartphone for consumers – which has resulted in razor-thin gross margins.

However, the company has been increasing its average selling price over the years. In the second quarter of 2019, Xiaomi increased its average selling price by 13.3% in China and by 6.7% in the rest of the world. Consequently, gross profit margins improved from just 3.3% in the first quarter of 2019 to 8.1% in the second quarter. 

The group also turned its cash-burning business into a cash-generating one. In the second quarter of 2019, the group generated RMB 13.6 billion (US$1.9 billion) in operating cash flow, a turnaround from the negative cash flow in previous years.

Valuation

After the steep fall in its share price, Xiaomi now trades at a much more palatable valuation. The group's shares have a price-to-sales ratio of 1 and trade at around 17x its annualized operating profit.

Given the group's potential to increase its selling prices and improve gross margins on its phones, along with the growth in its higher-margin internet services segment, its current valuation does not seem too demanding. Xiaomi's smartphone business could also benefit from the negative sentiment surrounding Huawei right now.

With all that said, I believe now may be a good time for investors to give Xiaomi shares a serious look.

A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.

The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple and recommends the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Xiaomi Corporation Stock Quote
Xiaomi Corporation
1810
$11.62 (-4.13%) $0.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.