Can Xiaomi live up to its $45-billion valuation? Though becoming China's top smartphone maker is impressive, the upstart will also have to make inroads into fast-growing markets like India. Even then, justifying its price tag will be a stretch.
In just one year, Xiaomi has tripled its market share to overtake Samsung as the leader in the world's largest smartphone market. Meanwhile, the company's valuation has soared more than fourfold: a 2013 funding round priced the group at $10 billion. Sales doubled to $12 billion in 2014, but the privately-owned group does not disclose its bottom line.
One way to look at Xiaomi's valuation is to think of it as a future rival to Apple. The Cupertino giant's shares trade at around 17 times its fiscal 2014 earnings. To achieve a similar multiple, the Beijing-based group will need to generate at least $2.6 billion of net profit.
That level of profitability may be feasible in China: Xiaomi's model of selling to loyal fans online has kept a lid on marketing and distribution costs. But it will be harder to replicate in other countries, where internet penetration is lower and competition for $100 smartphones is intense. Patent disputes like the one Xiaomi is facing in India will also push up costs. And though its phones are popular right now, it's a long way from winning Apple-style loyalty from customers. Xiaomi's valuation leaves little room for error.
In just one year, Xiaomi has tripled its market share to overtake Samsung as the leader in the world's largest smartphone market. Meanwhile, the company's valuation has soared more than fourfold: a 2013 funding round priced the group at $10 billion. Sales doubled to $12 billion in 2014, but the privately-owned group does not disclose its bottom line.
One way to look at Xiaomi's valuation is to think of it as a future rival to Apple. The Cupertino giant's shares trade at around 17 times its fiscal 2014 earnings. To achieve a similar multiple, the Beijing-based group will need to generate at least $2.6 billion of net profit.
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That's not impossible. China's smartphone market will expand to just over 514 million units by 2018, IDC forecasts. At an average selling price of $193, a 20 per cent market share - which Samsung had at its peak - will bring in revenue of almost $20 billion. More promising are opportunities elsewhere: IDC expects handset shipments for six emerging Asian markets to grow 22 per cent a year for the next three years, compared with 4 per cent in China. Though prices will be lower, a 10 per cent share of those markets would boost Xiaomi's total handset revenue to $24.6 billion by 2018. And that's before factoring in revenue from software and other products like air purifiers. A net profit margin of around 11 per cent would allow it to hit the earnings target.
That level of profitability may be feasible in China: Xiaomi's model of selling to loyal fans online has kept a lid on marketing and distribution costs. But it will be harder to replicate in other countries, where internet penetration is lower and competition for $100 smartphones is intense. Patent disputes like the one Xiaomi is facing in India will also push up costs. And though its phones are popular right now, it's a long way from winning Apple-style loyalty from customers. Xiaomi's valuation leaves little room for error.