After years of being an investor darling, notably thanks to its offensive in the electric vehicle sector, Xiaomi is now facing a brutal reality check. Since its peak in September, the company's share has lost 44%. Beyond a mere correction, this reversal is seen as a rejection of its business model. The group has become a target for short sellers, who now represent 7.5% of the stock's float, for the simple reason that the company is arguably the most exposed in the world to rising component costs.
The Reverse Leverage Effect
Xiaomi's business model relies heavily on volume because margins are too slim to drive the bottom line. According to Jefferies, 60% of its smartphones are sold for under $150 each. This presents a major problem: a $10 increase in the price of memory chips (DRAM/NAND) cannot be passed onto the selling price without losing customers.
Unlike Apple, which boasts a 45% gross margin capable of absorbing shocks and significant pricing power, the Chinese manufacturer cannot adjust its prices. With margins struggling to reach 15%, when costs rise by 5%, net profit does not just drop by 5% but is potentially actually halved. The company's main strength is thus turning against it.
AI Memory vs. EV Price War
Xiaomi is caught in a crossfire. On one side, massive demand for chips for artificial intelligence is draining global supply. Memory prices are skyrocketing, and entry-level companies are the first to pay the price. On the other side, in the electric vehicle market, the price war in China has reached irrational levels. Xiaomi's deliveries plummeted from 39,000 to 20,000 between January and February. To exist alongside BYD, which is beginning to penetrate the European market, or Tesla, already globally established, the manufacturer must lower its prices. It should be noted that Xiaomi's integration into the European market via Stellantis is still only in the discussion phase.
Inventory Risk Ahead of March 24
Sellers are betting on a major disappointment during the March 24 results, driven by an EPS consensus already down 20%. The primary risk is that Xiaomi finds itself with a massive inventory of components purchased at high prices just as final demand falters. If the release of new models in the automotive range fails to boost sales, accounting provisions that will drag down net profit (expected at -23%) seem almost inevitable.
The verdict will be delivered on March 24, revealing whether Xiaomi can still claim the status of a tech giant or if the company will buckle under the pressure of rising chip costs.
