Will There Be a Xiaomi IPO for the U.S. Market?

xiaomi ipo in 2018
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Xiaomi IPO in 2018

When I first heard rumors about a Xiaomi IPO in 2018, I thought: Let the Alibaba/Xiaomi comparisons begin!

And sure enough, I’ve already read three articles putting the two initial public offerings (IPOs) side by side. Writers tend to ignore that Xiaomi is going public in Hong Kong as opposed to New York, but I understand why they make the correlation.

You see, both Alibaba Group Holding Ltd (NYSE:BABA) and Xiaomi are Chinese tech companies. Both have millions of customers. And whether they admit it, both have deep connections to the Chinese government.

However, I’m not saying the Alibaba/Xiaomi comparisons are 100% accurate.

There’s no denying that BABA stock is closer to home. Retail investors can buy Alibaba shares from their regular trading accounts since BABA stock is listed on the New York Stock Exchange (NYSE).

It’ll be a lot trickier to buy Xiaomi stock in the U.S., given that the listing is halfway around the world, subject to different investment laws and regulations.

Despite those differences, I strongly recommend you pay attention to this IPO.

Not only does it show that Xiaomi is looking to steal global market share from rivals like Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co Ltd (OTCMKTS:SSNLF), but it reveals that China is serious about challenging America’s technological supremacy.

Just look at the numbers.

Last year, 137 Chinese firms went public in the U.S. or Hong Kong, including Foxconn (the company that builds Apple’s “iPhones”), China Literature Ltd (HKG:0772), and Sogou Inc (NYSE:SOGO). (Source: “Investors readying for a surge in blockbuster China IPOs,” CNBC, January 29, 2018.)

Do you think that’s a coincidence? If so, I have a beachfront property in Idaho you should check out.

The truth: China is obsessed with economic growth.

But in order to power that economic growth, China needs a vibrant technology sector and, by extension, a lot of capital. So, China is forced to either open its markets or let its corporate giants go overseas in search of capital. No surprise, it chose the latter.

Should You Consider Xiaomi Shares?

But enough big-picture analysis. Let’s get back on the ground.

The Xiaomi Hong Kong IPO is looking to raise $10.0 billion in one fell swoop, making it China’s biggest IPO since Alibaba (another reason analysts like to compare the two). We’re looking at a Xiaomi valuation of $70.0 billion to $80.0 billion.

Investors might also like the company’s fast-growing revenue, which registered at 67% in 2017, according to the IPO filing. The bad news is that Xiaomi couldn’t translate that sales growth into profits just yet. It turned a net loss of $6.9 billion last year. (Source: “Xiaomi’s Hong Kong IPO Is Expected to Be World’s Biggest This Year,” The Wall Street Journal, May 2, 2018.)

Hopefully, an increase in operational efficiency and fewer one-time charges can change Xiaomi’s fortunes in 2018. The signs are looking pretty good.

Just take a look at how Xiaomi’s international plans are unfolding:

    • Launching in France on May 22
    • Launching in Italy on May 24
    • Signed a deal to sell smartphones in the U.K.
    • Stepped up expansion in Spain
    • Aims for U.S. launch in late 2018/early 2019

Did I forget to mention something? Oh yes, Xiaomi also dominates the Indian smartphone market, which is the second-biggest cellphone market in the world. The biggest is China.

Combined, there are more than a billion smartphone users in China and India. By contrast, the United States has just 226 million.

Apple and Samsung can fight over that market as much as they like, because they’re playing a game of luxury smartphones. Xiaomi can simply focus on the rest of the world.

Xiaomi Is NOT Apple, It’s Xiaomi

Although the stock market rewarded Apple for its recent earnings report, the fact remains that U.S. smartphone sales are slowing. Apple is coping with this pullback by raising iPhone prices.

We saw this in the quarterly report, where total revenues surged despite unit sales barely moving higher. I suspect that the $1,000 price tag of the “iPhone X” was responsible for that discrepancy. (Source: “Apple Inc. Q2 2018 Unaudited Summary Data,” Apple Inc., May 1, 2018.)

Who knows, maybe this strategy will help Apple keep its market share in the United States.

But Xiaomi is taking a different path. It chooses to make high-quality phones on a budget, keeping all of its prices firmly under $700.00. In service of this goal, the company has promised to hold profit margins under five percent.

Customers are pretty happy about that decision, or at least they would be if they knew, but it’s obviously bad news for would-be shareholders.

After all, Xiaomi’s obsession with low margins could hurt its long-term growth.

I understand that. However, try to remember that Xiaomi can’t simply follow the Apple model of success.

Why? Well, because no one is going to buy a $1,000 Xiaomi phone. The only way for Xiaomi to rake in cash is by getting people on its phones, then using those phones as a way to rope people into services.

So, getting phones into people’s pockets is only the first step.

A Brief History of Xiaomi

Xiaomi launched in 2010, which makes it younger than the “FAANG” stocks—Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple, Netflix, Inc. (NASDAQ:NFLX), and Google (otherwise known as Alphabet Inc (NASDAQ:GOOG))—that dominate North American markets.

Since that time, Xiaomi has expanded in more ways than one. We’ve already covered the international growth story, but there’s also Xiaomi’s push into laptops, TVs, and routers.

Last, but certainly not least, the company is aggressively pursuing a line of connected home devices.

The pivot to these business lines hasn’t always been smooth.

Xiaomi was temporarily banned in India during a 2014 legal dustup with Ericsson. The presiding judge eventually granted a waiver for Xiaomi to continue business in the country. And thank goodness he did, because Xiaomi was on a roll in India.

It officially crossed Samsung as the subcontinent’s biggest smartphone seller earlier this year.

Analyst Take

No one really knows what Xiaomi will look like five years from now. No one knows what the Xiaomi stock price will be, either. But the mere fact that the company is raising cash from foreign investors speaks volumes. I wouldn’t bet against it.

Keep an eye out for Xiaomi’s North American invasion, because it’ll come as sure as the sun will rise. At that time, if Xiaomi needs to raise more capital, I suspect that they’ll opt for a secondary listing on the New York Stock Exchange.

I don’t think it’ll happen in 2018, but, by this time next year, it might be possible for U.S. investors to trade Xiaomi stock in good old American greenbacks.