Following the extremely high profile Alibaba Group Holding Ltd (NYSE:BABA) IPO, which briefly looked like it would go down as the final sign of a market top, it’d be a mistake to underestimate the appeal of rapidly growing Chinese tech companies. So you might expect that the Chinese smartphone manufacturer Xiaomi Corp.’s latest funding round is raking in capital, but the reported $40 billion to $50 billion valuation still seems surprising.
Xiaomi increased revenues more than 270% in 1H14
Earlier this year, Xiaomi Corp. reported on their blog (h/t Kaylene Hong at The Next Web) that they had sold 26.1 million smartphones in the first half of the 2014, an amazing 271% increase over the year. When you add the fact that Xiaomi reported 160% growth from 1H12 to 1H13, it’s easy to see why investors are excited. Xiaomi CEO Lei Jun says that he intends to ship 100 million smartphones next yeat.
Total revenue from those 1H14 sales was an impressive CNY33 billion, about $5.4 billion, but without knowing the company’s margins that’s of only limited usefulness. To put the figure in perspective, Samsung Electronics Co. Ltd. (LON:BC94) (KRX:0059935) had $105 billion in revenue over the same six-month period and its market cap is $165 billion. Obviously Samsung doesn’t have the explosive upside potential as Xiaomi Corp., but if we assume its margins are similar (we’ll come back to this) a $50 billion valuation would suggest that investors expect Xiaomi to be five or six times larger in the next couple of years.
Xiaomi trading profits for growth
That’s already fairly ambitious, but there’s reason to think that Xiaomi Corp. sells its smartphones and tablets as cheaply as it can in order to drive volume. Xiaomi is well known for its flash sales that sell out immediately: a recent flash sale in India sold out in just four seconds, Bloomberg reports, which sounds a lot like a company looking to trade profits for growth.
And the strategy has worked. Xiaomi surpassed Samsung Electronics Co. Ltd. (LON:BC94) (KRX:0059935) as the biggest smartphone manufacturer in China a couple months back. Whatever their profitability looks like today, taking the biggest slice of the biggest pie has to be worth quite a bit in the long run.