There should be no question that what Chinese smartphone maker Xiaomi has accomplished over the span of four short years is incredibly impressive. It's even more impressive considering Xiaomi didn't actually ship its first smartphone until 2011. Since then, Xiaomi has become the fastest growing smartphone vendor in the fastest growing smartphone market, by combining services with solid hardware specs and aggressive pricing.
Oh, and blatantly copying Apple in numerous ways helps too. Xiaomi even poached Hugo Barra from Google to lead its international expansion efforts (who has vociferously denied said allegations of copying).
Nevertheless, Xiaomi is putting it up where it counts, climbing to become the No. 3 worldwide smartphone vendor by unit volumes last quarter, behind only Apple and Samsung. Xiaomi could now be worth over $40 billion.
The Amazon.com and Apple of China?
The private company is reportedly seeking to raise $1.5 billion in new capital at a $40 billion to $50 billion valuation. It's unclear precisely what Xiaomi wants to use that money for, but in addition to expanding into new markets the company has also been broadening its product portfolio recently. The company launched its second-generation MiBox streaming set-top box earlier this year.
There aren't a lot of public details about Xiaomi's finances, although it has been widely reported that Xiaomi seeks to sell devices near cost with the goal of profiting off content and services later on, similar to the model that Amazon.com typically uses with its hardware sales (other than with its initial Fire Phone pricing strategy). With limited data available, I wondered how long Xiaomi's success could last since most Android vendors (other than Amazon) have a poor track record with operating economically viable content and services ecosystems.
Xiaomi is surprisingly profitable
Well, the Wall Street Journal is now offering up some more pertinent financial details after having perused a "confidential document." It turns out that Xiaomi is indeed profitable, even as it competes aggressively in low-end markets.
The company realized a net profit of 3.5 billion yuan ($566 million) last year, which was an 84% jump from the year prior, and was predicting another 75% jump for the bottom line this year. Revenue doubled to nearly 27.4 billion yuan ($4.5 billion). That implies an impressive 12.6% net margin, which seems unthinkable when we're talking about low-cost commoditized devices.
Unlike Samsung, Xiaomi is very efficient with its marketing spend, with less than 4% of sales going to sales and marketing. It also relies heavily on word-of-mouth recommendations, which is widely considered the cheapest and most effective form of marketing.
What's even more impressive is that the WSJ says 94% of revenue is hardware sales, so it's not as if high-margin services are what's driving the bottom line. Of course, the flip side to such a high proportion of revenue coming from hardware (while indeed impressive) is that Xiaomi may not be building platform loyalty if users are not buying content and services.
Xiaomi is doing remarkably well, and quite frankly much better than this Fool expected, but the concerns about its long-term ability to sustain profitability in the face of continued pricing pressures linger.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.