Xiaomi: Building a Seamless Ecosystem

Xiaomi is one of the world’s biggest smartphone makers, but its business goes far beyond phones. The company is building a connected ecosystem that includes smart home devices, wearables, internet services, and even electric cars - all working together through a shared software platform. Xiaomi’s focus on affordability, product integration, and global reach has helped it grow quickly and attract millions of loyal users. As it expands into more premium products and new markets, the big question is: Should Xiaomi be part of your investment portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Xiaomi at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Xiaomi, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Xiaomi Corporation is a diversified Chinese technology company founded in 2010. It is best known as the world’s third-largest smartphone maker, with a strong presence in China, India, and Europe. The company operates across several synergistic segments including smartphones, smart devices, internet services, and electric vehicles. Its core business revolves around competitively priced, feature-rich smartphones under the Mi, Redmi, and MIX series. These devices serve as the entry point into Xiaomi’s broader ecosystem. Surrounding the phone business is a wide portfolio of consumer electronics such as smart TVs, wearables, air conditioners, tablets, and home appliances. These devices are designed to integrate seamlessly with Xiaomi’s operating system and apps, encouraging users to stay within its ecosystem. Xiaomi also runs a high-margin internet services segment, which includes advertising, cloud services, app store commissions, and digital content delivered through its proprietary MIUI system. With over 700 million monthly active users globally, Xiaomi is able to monetize its large installed base long after a device is sold. In 2024, Xiaomi entered the electric vehicle space with the launch of the SU7 sedan. The move marked a significant diversification into personal mobility and reflects Xiaomi’s broader “Human × Car × Home” strategy, which aims to unify all of its offerings under one software ecosystem. The company is also investing in longer-term innovation through research in artificial intelligence, robotics, and the development of its own operating system, HyperOS. Xiaomi’s competitive moat lie in the scale and integration of its ecosystem, its efficient cost structure, and its ability to innovate rapidly. By selling affordable devices and keeping hardware profit margins thin, Xiaomi is able to scale quickly and enter markets with price-sensitive consumers. At the same time, it drives profitability through software and internet services, which enjoy far higher margins. The company’s approach creates a powerful network effect. A user who buys a Xiaomi phone is more likely to purchase additional products like earbuds, smart TVs, or home appliances, all of which connect and work better together. This ecosystem strategy increases customer stickiness and allows Xiaomi to collect user data that further enhances its products and services.

Management

Lei Jun is the Co-founder, Chairman, and CEO of Xiaomi Corporation, a position he has held since the company’s founding in 2010. As both a founder and an active executive, Lei Jun continues to play a central role in shaping Xiaomi’s long-term strategy, culture, and business execution. His leadership is widely seen as one of the key drivers behind Xiaomi’s rapid rise to become one of the world’s largest smartphone and consumer electronics companies. Lei Jun brings over three decades of experience in China’s technology and internet sectors. Before establishing Xiaomi, he co-founded Kingsoft Corporation, a software company where he served as CEO and currently remains Chairman of the Board. He also co-founded the online bookseller Joyo.com, which he sold to Amazon in 2004 for $75 million, a milestone transaction that cemented his reputation as a visionary entrepreneur in China’s early internet landscape. Under Lei Jun’s leadership, Xiaomi has expanded far beyond smartphones into a broad ecosystem that includes smart home devices, internet services, and most recently, electric vehicles. His long-standing belief in combining hardware with internet services has shaped Xiaomi’s unique business model, which blends affordable, high-quality devices with recurring revenue from services. In his own words: “If we don’t offer internet services, our model would be the same as a hardware company, and our company wouldn’t be sustainable”, a philosophy that continues to guide Xiaomi’s strategic priorities, especially as it pursues high-margin growth in areas like advertising and content. Lei Jun holds a bachelor's degree in Computer Science from Wuhan University, where he also serves as a member of the board. His achievements have been widely recognized. In 2021, he was named China’s Best CEO by Forbes China, a testament to both his entrepreneurial vision and his operational effectiveness. As of 2024, Lei Jun ranks among the top 120 wealthiest individuals in the world, underscoring the scale of the business he has helped build. Despite this personal success, he remains deeply involved in the day-to-day leadership of Xiaomi, including its aggressive entry into the premium EV market and continued international expansion. Lei Jun’s track record, founder-led commitment, and product-centric leadership style make him a uniquely credible figure to lead Xiaomi through its next phase of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Xiaomi made its IPO in July 2018, so we only have numbers from 2018 and onwards, and the 2018 numbers are not a full year. Xiaomi has achieved an underwhelming ROIC, only topping 10 percent in one full year since its IPO. Xiaomi’s historically low ROIC is mainly due to how the company has chosen to grow. It sells its hardware, like smartphones and smart home devices, at very low profit margins, with a self-imposed cap of 5 percent. This helps Xiaomi build a large customer base and grow revenue, but it also means profits are relatively small compared to the money invested. On top of that, Xiaomi has spent heavily over the years to expand its ecosystem. This includes investing in research and development, building out supply chains and retail stores, and expanding internationally. These investments are important for long-term growth but can weigh on returns in the short term. While Xiaomi’s internet services, like advertising and app sales, are much more profitable, they still make up a small part of total revenue. And with its recent move into electric vehicles, Xiaomi is now investing even more in factories and product development, which adds further pressure on returns until that business matures. Low ROIC is not necessarily a red flag for Xiaomi. The company is currently prioritizing scale, expanding its user base, product ecosystem, and presence across categories, which involves accepting lower returns in the short term. This approach focuses on gaining market share and building long-term strategic value rather than maximizing immediate financial efficiency. Over time, ROIC has the potential to improve as higher-margin internet services expand, EV investments begin to deliver results, and the overall product mix moves further upmarket.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year.  Xiaomi has been able to grow equity steadily with growth every year except for one. Xiaomi has managed to increase its equity almost every year since going public, mainly because it runs a consistently profitable business and keeps most of those profits within the company. Even though its hardware margins are low by design, Xiaomi has steadily grown its adjusted net profit over time. Since it doesn’t pay out large dividends, those profits stay in the business and are added to equity. The company has maintained a strong balance sheet with relatively little debt, which helps avoid financial pressure and supports long-term reinvestment. The only year equity didn’t rise likely reflects external factors, such as currency movements or changes in the value of investments, rather than any deeper business issue.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Xiaomi reported negative free cash flow in 2019 and 2022, mainly due to high investment activity and the way cash was tied up in day-to-day operations, rather than weak business performance. In 2019, the company was expanding rapidly into new markets, which led to higher inventory levels and increased spending on logistics and infrastructure. At the same time, more cash was used for things like advance payments to suppliers and delayed collections from customers, reducing the cash available from its core business. In 2022, global demand for electronics slowed due to inflation, supply chain issues, and a post-COVID adjustment. Xiaomi responded by building up inventory and offering more flexible payment terms to partners, which again absorbed cash. The company also increased investment ahead of its entry into the electric vehicle market. Despite these pressures, Xiaomi remained profitable in both years, and the negative free cash flow reflected investment-heavy decisions rather than any underlying weakness. Free cash flow improved significantly in 2023 and 2024. Profitability reached new highs, supported by stronger margins and a growing share of internet services in the revenue mix. Xiaomi also became more efficient at managing inventory and collecting payments, which helped release cash from operations. While R&D spending continued to grow, the company held back on other capital expenditures after earlier years of expansion. At the same time, higher-margin product lines like premium smartphones and internet services contributed more to earnings. Levered free cash flow margins have historically been relatively low for Xiaomi because the company operates with thin hardware profits by design, reinvests heavily in growth, and only recently began seeing meaningful contributions from higher-margin businesses like internet services. Large investments in R&D, supply chains, and expansion, combined with modest pricing on devices, have limited the amount of free cash left over relative to revenue. The free cash flow yield suggests that the company is currently trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to investigate is the level of debt—specifically, whether a business carries a manageable amount that could be paid off within three years. This is evaluated by dividing total long-term debt by earnings. In Xiaomi’s case, the calculation shows the company has 0,75 years of earnings in debt, well below the three-year threshold. Therefore, debt is not a concern when considering an investment in Xiaomi. In fact, the company has consistently maintained a low debt-to-earnings ratio since its IPO.

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Risks

Competition poses a significant risk to Xiaomi across both its core smartphone business and its newer electric vehicle segment. The global smartphone industry is mature and highly competitive, with market share concentrated among a few dominant players. Xiaomi operates in a crowded field, competing with Apple and Samsung at the high end and with other Chinese brands like Vivo, Oppo, and Transsion in price-sensitive emerging markets. This has already impacted performance in key regions, such as India, where Xiaomi’s smartphone market share declined from 18 percent to 12 percent in early 2025 as competitors gained ground. At the high end, Apple’s growing focus on pricing strategies and ecosystem integration continues to limit Xiaomi’s ability to expand in the premium segment, particularly in China. At the same time, rapid advancements in AI may change consumer expectations around smartphones, raising the stakes for companies that fail to differentiate or commercialize new technologies quickly enough. The competitive pressures extend to Xiaomi’s electric vehicle business, where it faces established players like BYD, Tesla, NIO, and Geely. The EV market in China has become increasingly aggressive, with frequent price wars and rapid product cycles. This environment challenges new entrants like Xiaomi to maintain pricing power and profitability. If Xiaomi’s new products, whether in smartphones or EVs, fail to meet market expectations or keep pace with rivals in innovation and value, the company risks losing share and compressing margins.

Regulatory and geopolitical risk is a meaningful concern for Xiaomi, given its position as a Chinese consumer electronics company operating globally across sensitive sectors like smartphones, internet services, and electric vehicles. While Xiaomi has largely avoided the most direct consequences of China’s domestic tech crackdowns, unlike some internet platform companies, regulatory uncertainty still remains. Any future tightening around data privacy, antitrust enforcement, or the integration of devices and services could impact Xiaomi’s business model, especially its ecosystem-driven strategy. Internationally, geopolitical tensions pose even greater risks. Xiaomi was briefly blacklisted by the U.S. government in 2021 and had to fight a legal battle to reverse the designation. Although the company succeeded, the episode illustrates the vulnerability of Chinese tech firms to shifts in foreign policy. Export controls, sanctions, or restrictions on access to advanced semiconductors and key technologies could disrupt Xiaomi’s supply chain or delay product development. India, one of Xiaomi’s largest overseas markets, also presents ongoing challenges. The company has faced scrutiny from Indian authorities over financial practices such as royalty payments and remittances, leading to asset freezes and compliance investigations. More broadly, rising protectionism and political tensions between China and other nations could result in trade barriers, increased tariffs, or limitations on market access.

Macroeconomic factors represent a key risk to Xiaomi’s business, as the company operates in sectors that are closely linked to consumer discretionary spending. Demand for smartphones, smart home gadgets, and electric vehicles tends to decline during periods of economic slowdown, rising interest rates, or high inflation. When consumers cut back on spending, Xiaomi’s core product categories, many of which are non-essential or upgrade-driven—are among the first to be affected. For instance, India’s smartphone market, one of Xiaomi’s most important, contracted by 8 percent year over year in the first quarter of 2025 due to weak consumer sentiment and elevated inventory levels. In Europe, where Xiaomi has been expanding its market share, continued economic uncertainty could weigh on mid-range smartphone sales. Fluctuations in foreign exchange rates also pose a risk. Xiaomi generates revenue in many currencies but pays for many components in US dollars. A stronger dollar or rising input costs, such as those for semiconductors, displays, or EV batteries, can squeeze margins if the company is unable to raise prices in local markets. In highly competitive segments like smartphones and EVs, passing on costs to consumers is not always feasible without risking market share. In the EV segment, macroeconomic policies play a particularly influential role. Consumer demand is partly driven by government subsidies and fuel prices. Any reduction in EV incentives, such as China’s gradual phase-out of subsidies, could dampen demand, especially since Xiaomi is entering the market with models targeted at value-conscious consumers.

Reasons to invest

The Human × Car × Home ecosystem is one of the most compelling reasons to invest in Xiaomi.  It represents the company’s strategic push to unify its smartphones, smart home devices, and electric vehicles through a single operating system - HyperOS - and deep integration of artificial intelligence. This cross-device connectivity allows Xiaomi to deliver a seamless user experience across categories, which not only boosts customer convenience but also enhances user stickiness and cross-selling potential. Xiaomi’s smartphone business continues to serve as the foundation of this ecosystem. The company consistently ranks among the top three global smartphone makers and is gaining traction in the premium segment. As users move upmarket, Xiaomi increases its ability to cross-sell higher-margin services and connected devices, such as wearables, tablets, and audio products, all designed to interact smoothly within the same ecosystem. The IoT and lifestyle products business plays a central role in reinforcing this strategy. Xiaomi has scaled a wide portfolio of connected home appliances, many of which can be controlled through its smartphones or HyperOS interface. Products such as smart air conditioners, robot vacuums, and wearables benefit from this integration, creating a more convenient and personalized smart home experience. This segment has also become more profitable over time, helping to stabilize earnings and diversify the business beyond smartphones. Xiaomi’s expansion into electric vehicles brings the final pillar to the ecosystem. The SU7 EV marks the company’s entry into smart mobility, and its strong initial sales performance demonstrates the potential for Xiaomi to become a serious player in the automotive space. The car is not just a standalone product, it is designed to connect with users’ phones, home devices, and services through the same operating system, reinforcing Xiaomi’s ecosystem-driven approach. This strategy gives Xiaomi a powerful flywheel: customers who buy a Xiaomi phone are more likely to purchase other Xiaomi products, subscribe to its services, or drive one of its vehicles.

Xiaomi’s internet services business is a key reason to invest in Xiaomi, because it delivers strong profitability and is becoming an increasingly important driver of the company’s overall financial performance. Unlike the company’s hardware divisions, which intentionally operate with thin margins to drive volume and ecosystem growth, the internet segment generates high returns with relatively low capital requirements. This business includes advertising, app store revenues, themes, cloud storage, and content services, all of which are deeply integrated into Xiaomi’s MIUI operating system and ecosystem of devices. As users engage with Xiaomi phones, tablets, TVs, and other smart products, the company is able to monetize that usage through digital services, making this a core pillar of its long-term strategy. One of the most attractive aspects of this segment is its scalability. As Xiaomi continues to grow its global user base, now in the hundreds of millions, the cost of delivering internet services remains relatively fixed, while monetization opportunities expand. This creates strong operating leverage: incremental revenue adds meaningfully to profits. The company has also become more effective at monetizing internationally, particularly in markets where smartphone adoption is still growing and digital ad markets are maturing. The profitability of internet services also helps offset the low-margin nature of Xiaomi’s hardware business. While phones and IoT devices are used to draw people into the ecosystem, internet services are what turn that scale into margin. Over time, this mix shift, toward more digital revenue from an engaged user base, is expected to support higher overall profitability.

Expanding retail is a reason to invest in Xiaomi because it strengthens the company’s broader strategy of premiumization, ecosystem integration, and global reach. The company is not simply adding more stores, it is building a physical infrastructure that enhances brand visibility, deepens customer engagement, and improves the shopping experience across its expanding product portfolio. In China, Xiaomi now operates around 15,000 Xiaomi Home stores and 200 automobile sales outlets. These stores serve as key touchpoints to showcase high-end smartphones, smart home devices, and increasingly, its electric vehicles. As Xiaomi shifts toward higher-margin, premium products, retail stores help communicate that positioning to consumers, especially in markets where in-person experience still plays a major role in purchasing decisions. Larger store formats and upgraded design are also helping the brand appear more upscale, which supports higher pricing and customer retention. Retail expansion is also tightly linked to Xiaomi’s "Human × Car × Home" ecosystem. By displaying phones, appliances, and vehicles together in the same physical space, Xiaomi can demonstrate the cross-device synergies of its AI and HyperOS platforms in a way that online sales cannot fully capture. This kind of real-world ecosystem experience is especially useful in building brand loyalty and convincing users to stay within the Xiaomi product family over time. Internationally, Xiaomi is beginning to replicate its domestic success. It has already opened flagship Xiaomi Home stores in markets like Poland and Southeast Asia, with plans for further expansion across Europe, Japan, and Korea. This push is especially important because Xiaomi sees overseas markets as having at least twice the potential of China in terms of long-term growth. A local retail presence not only helps drive sales of premium smartphones and smart home products but also supports logistics, after-sales service, and brand trust.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,99, which is from the year 2024. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 27% in the next five years, but 15% is the highest I use. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Xiaomi's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be HKD 29,70. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Xiaomi at a price of HKD 14,85 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 42, and capital expenditures were 8. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 6 in our calculations. The tax provision was 5. We have 25,1 ,outstanding shares. Hence, the calculation will be as follows: (42 – 6+ 5) / 25,1 x 10 = HKD 16,33 in Ten Cap price. 

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Xiaomi's free cash flow per share at HKD 1,36 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is HKD 21,47.

Conclusion

I believe that Xiaomi is an intriguing company with strong management. It has built a moat through the scale and integration of its ecosystem, an efficient cost structure, and rapid innovation. While the company has historically posted a low return on invested capital, this reflects its strategic focus on scale and ecosystem expansion rather than a structural weakness. It has experienced years of negative free cash flow, but in the past two years has delivered record levels of free cash generation, a trend that could continue. Competition remains a major risk, with intense pressure in its core smartphone segment from global leaders and regional challengers, and a difficult path ahead in the electric vehicle market where established players and price wars make it hard to defend margins. Regulatory and geopolitical risks are also significant, as Xiaomi depends on global markets and is exposed to evolving policy environments in both China and overseas. These include domestic tech regulation, export controls, and political scrutiny in key countries such as India and the United States, all of which could affect its supply chain or operations. Macroeconomic factors present further challenges, since demand for smartphones, connected devices, and EVs tends to decline when consumers face inflation, economic uncertainty, or rising interest rates. Currency swings and rising input costs can also squeeze margins, especially when passing on prices is difficult. On the positive side, Xiaomi’s Human × Car × Home ecosystem is a compelling reason to invest. By linking smartphones, smart home devices, and electric vehicles through a unified operating system, the company delivers a seamless AI-powered experience that drives user loyalty, cross-category purchases, and stronger monetization. Its internet services business is another important driver, producing high-margin, capital-light income that scales efficiently as the global user base grows. This helps improve Xiaomi’s overall profit profile and offsets its low-margin hardware operations. The company’s expanding retail footprint adds to the investment case by reinforcing its premium positioning and giving consumers an in-person experience of its ecosystem. These stores support brand strength, pricing power, and user engagement both in China and in growing overseas markets. I believe Xiaomi is a strong business and that buying shares at the Payback Time price of HKD 21 would represent a good long-term investment.

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