Xiaomi’s upward valuation hike hard to justify

November 4, 2014

By Ethan Bilby

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Chinese smartphone maker Xiaomi is a hit with customers, but its upward valuation spiral seems hard to justify. A new funding round could value the group at a mooted $50 billion. That suggests investors are valuing it the same way they do tech giant Apple. Xiaomi is growing fast, but it lacks its U.S. rival’s dominance or innovation.

Not even five years old, Xiaomi is already nipping at the heels of far more established competitors. The Chinese handset-maker’s last funding round in 2013 priced the group at $10 billion, when it was the Middle Kingdom’s sixth largest smartphone brand by shipments. Now, the group is China’s top smartphone maker, having overtaken Samsung in the second quarter of 2014, according to tracker Canalys.

As a private company Xiaomi releases limited financials. But it has said it made over $5 billion in sales for the six months ending June, and hopes to exceed $11.4 billion for the full year. That would make a $50 billion valuation equivalent to about 4.4 times the current year’s sales. That seems generous. U.S. technology giant Apple is trading on a valuation equivalent to 3.5 times sales, according to Eikon.

It’s not out of the question that Xiaomi could become China’s Apple. But there are two things it lacks. The Californian group is innovative – it helped introduce consumers to the PC and touch-controlled smartphone. Many of Xiaomi’s products essentially follow in Apple’s footsteps, but at lower prices. Apple is also dominant in its niche, with a 42 percent U.S. market share according to ComScore. Xiaomi’s local market share is just 14 percent.

Xiaomi has some creative flair, and certainly is a whiz at marketing, but not enough to justify luxury-goods style margins. Its operating system is a modified version of Google’s Android rather than being a wholly new invention. Xiaomi has come a long way – economies of scale and willing investors can probably take it further, even outside of its home market, China, where most of its sales still take place. But awarding it an Apple-type valuation seems premature.

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