Xiaomi Stock Goes Public
On July 9, 2018, Xiaomi Corporation went public amid the worst conditions possible: 1) the U.S. and China had waded into a trade war, 2) uncertainty was spreading like wildfire, and 3) the Hang Seng Index was starting to look like a disaster zone.
Given this onslaught of bad news, it’s no surprise that the Xiaomi stock price crashed 5.88% during its first trading session. However, those shares turned on a dime the next morning, surging by up to 14%.
Personally, I think the mood swings stem from a lack of narrative. Investors always need a strong narrative—a clear investment thesis, in other words—before putting money into growth stocks. Especially growth stocks from halfway around the world.
Although these sound different, they share a common refrain of hope and unseen potential. Sometimes it’s “a promising new drug in the pipeline,” or “double-digit growth in a new business line,” or an “acquisition spree to buy out the competition.”
What is Xiaomi’s narrative?
Is it similar to Alibaba Group Holding Ltd (NYSE:BABA), in the sense that it’s a Chinese tech giant that can successfully leap onto the world stage? Or is it a flailing smartphone maker that missed its window to “go global”?
We need to figure this out. Only then can we judge if Xiaomi stock is a diamond in the rough or a lump of coal.
Xiaomi Valuation: A Few Details
Before we make any grand announcements about Xiaomi stock, though, it might help to go through the initial public offering (IPO) details.
Here’s a quick list of what the company had hoped for:
- Valuation: US$100.0 billion
- IPO Price: Between HK$17.00 and HK$22.00
- No. of Shares: 2.18 billion
(Source: “How Xiaomi Went From Has-Been to World’s Biggest IPO in Years,” Bloomberg, May 2, 2018.)
Had this fantasy played out, had Xiaomi gone public with a US$100.0 billion valuation, it would have been the largest IPO since Alibaba.
But it didn’t. Instead, the numbers looked like this:
- Valuation: US$50.0 billion
- IPO Price: HK$16.60
- No. of Shares: 2.18 billion
(Source: “Xiaomi’s weak debut signals trouble for upcoming Hong Kong tech listings,” Reuters, July 8, 2018.)
The company netted US$3.05 billion after investment banks gouged them with fees and expenses. Nevertheless, the money raised is enough to fund Xiaomi’s international growth.
“I think short-term stock price is mostly dictated by market conditions. What we will be doing is to focus on the long-term growth of our business,” Xiaomi President and Co-Founder Lin Bin told CNBC’s Emily Tan on Monday. (Source: “Shares of Chinese smartphone maker Xiaomi stumble on their debut, slipping as much as 6%,” CNBC, July 9, 2018.)
Bin doesn’t seem too worried about the opening. Maybe that indifference swung investors around on the stock, because it soared by 14% in its second trading session, adding another US$6.0 billion to Xiaomi’s market cap.
What Is Xiaomi’s Story?
It’s very clear what narrative Xiaomi would prefer.
The company’s C-suite is always claiming it’s not just a smartphone company, but a “new species” of company, something much broader and tougher to define. (Source: “There has never, ever been a company exactly like Xiaomi,” Quartz, June 23, 2018.)
“You shouldn’t think of Xiaomi as a hardware company, or an internet company, or an e-commerce company,” CFO Chew Shou said at an event in June. “We are the rare company that can do hardware, and do internet, and do e-commerce. This sort of company basically has not existed before.”
The idea is for Xiaomi to sell a lot of smartphones in China, India, and Southeast Asia, then charge advertisers a boatload of cash to access those eyeballs. And while this business is chugging along in the background, it wants to also develop a thriving Internet business.
It’s a bold vision.
If it works, Xiaomi will move away from a capital-intensive, low-margin business into exactly the opposite—an Internet business with juicy returns. But what’s the catch?
Simple: No company has ever done it before.
I can’t recall a single case where an “Android” smartphone maker built a successful Internet business. Samsung? No. HTC? No. Nokia? Don’t make me laugh. All down the list, companies that don’t pair hardware and software to begin with are unable to compete.
Do you believe Xiaomi can do what’s never been done before? That’s the question you have to ask yourself before investing in this Chinese tech giant. I think it’s worth a shot if you’re a risk-capital investor.
If you’re more risk-averse, however, maybe it’s best to stay on the sidelines. Chinese IPOs have underperformed in the last two years (with the exception of iQiyi), meaning that recent history is not your friend. Neither is circumstance, given the sudden trade war instigated by President Donald Trump.
So, all in all, I’d stay away from Xiaomi stock until the company displays greater strength in its Internet business.