Could this Chinese newcomer be the next Apple?

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As we all know, is Apple one of the most successful companies ever. Since the company’s IPO in 1980, the company’s shares have increased 1000-fold in value. And that doesn’t include the dividends Apple has been paying since 2012.

The company has already grown to extreme heights with a market cap of nearly $ 1.7 trillion. But some investors may be wondering which company could become the “next” Apple if there was such a thing.

A candidate could develop in China. This emerging smartphone maker only has a $ 50 billion market cap, that’s 1/34 the size of Apple. Still, its business looks remarkably similar to Apple’s, and recent results show that it is successful even in times as difficult as this.

Xiaomi is transforming smartphone sales in emerging markets

The Chinese smartphone manufacturer Xiaomi (WKN: A2JNY1) was founded in 2010 and went public in 2018. Although technology stocks have developed quite well since then, Xiaomi’s shares are still slightly below their IPO price today. And that despite the fact that the stock has recently recovered. The company’s market cap, around $ 49 billion, is also well below the $ 100 billion mark. The company originally set itself this goal with its IPO.

But on closer inspection, Xiaomi’s business actually worked quite well during this time. And Xiaomi’s business model looks remarkably similar to Apple’s, albeit with some slight differences.

How Xiaomi resembles Apple

Like Apple, Xiaomi wants to delight its smartphone customers with a first-class experience, which leads to loyal users around the world. Xiaomi has also expanded its brand and connected it to a variety of other electronic devices as part of its Internet of Things (IoT) device segment. When Apple launched additional devices such as the iPod, the iPad, Apple Watch, Apple TV, Homepod and headphones, Xiaomi became even more aggressive and put its name on household appliances, smart TVs, smart watches, robot vacuum cleaners, internet routers , Streaming TV “Mi” boxes, headphones, electric scooters and much more.

Like Apple – and most importantly for Xiaomi’s finances – Xiaomi has expanded its range of high-margin Internet services for its users. This area includes advertising revenue, online games, the Youpin e-commerce platform, fintech services and video subscription services that are provided via Xiaomi’s smart TVs and “mi box” streaming platforms.

How Xiaomi differs from Apple

Xiaomi has a very similar business model to Apple, but it also differs somewhat in some respects. First and most importantly, while Apple is a premium smartphone manufacturer, Xiaomi started its business as a low-cost provider. In fact, the company founder vowed to limit the company’s hardware net margins to 5%.

While that may not be music to shareholders, it could actually prove to be a very smart strategy. This is because a large number of users will strengthen Xiaomi’s services. These have a very high gross margin, which is normally around 60%. However, it should be noted that it was slightly lower in the last quarter due to a lower advertising mix in the middle of COVID-19. By comparison, the company’s gross margin is 8.1% for smartphones and 13.4% for IoT devices.

On a positive note, the services sector has significantly increased its share of Xiaomi’s total revenue, from just 4.9% of sales in 2015 to an all-time high of 11.9% in last quarter.

Apple: First quarter 2020 Percentage of earnings Gross margin
Products 77,1 % 31,3 %
Services 22,9 % 65,4 %
Xiaomi: first quarter 2020 Percentage of earnings Gross margin
Smartphones 61 % 8,1 %
IoT products 26,1 % 13,4 %
Internet services 11,9 % 57,1 %

Unlike Apple, Xiaomi doesn’t have a proprietary operating system like Apple with iOS. Although Xiaomi advertises its MIUI operating system as unique, it is a customized form of the ubiquitous Android operating system.

Positive current results

Although Xiaomi is less profitable than Apple, the company is growing faster and expanding its overall margins. Even in the first quarter, which was disrupted by the pandemic. Xiaomi increased sales by 13.6% in the last quarter, and gross profits increased by 44.9% as gross margins rose from 11.9% a year ago to 15.2%, while internet services grew by 38.6% and thus surpassed the hardware segments.

While deliveries to China declined as it was the first place COVID 19 cases broke out, Xiaomi continued its impressive overseas growth. It held the highest market share in India and increased deliveries in Western Europe by 79.3%. In addition, it became number 1 in Spain for the first time. In the past quarter, half of Xiaomi’s sales were generated in the international market for the first time. This shows that its affordable phones are not just a Chinese phenomenon. What is impressive is that Xiaomi was one of only two major phone sellers whose total deliveries increased in the pandemic-related first quarter.

In the meantime, 5G opens up another opportunity. At the end of the quarter, Xiaomi launched an affordable 5G phone in China, the Mi 10 Lite Zoom Edition, for just 2,099 Chinese renminbi (just under $ 300), and the Mi 10 Lite 5G in international markets for 349 euros (just under $ 400) ).

Could Xiaomi be the next Apple?

It remains to be seen if Xioami can one day become a trillion dollar company like Apple, but the stocks still look convincing. Xiaomi grew 13.6% in the last quarter, and Apple’s earnings remained largely unchanged. But Xiaomi is still trading at 33.5 times, while Apple is trading at 30.2 times the profits. The companies are valued almost the same, despite the higher growth prospects.

Xiaomi’s management apparently also believes the stocks may be undervalued. It recently approved a $ 4.3 billion share buyback program in June, almost 10% of its current market cap.

Risks to consider

Investing in Xiaomi is associated with a certain degree of risk as it is a Chinese stock. Tensions between the United States and China can affect their business. However, Xiaomi currently has no US business and appears to be doing well in Europe. It is therefore difficult to imagine how the trade tensions will directly affect Xiaomi. In fact, they could even prove to be an advantage for the company if smartphone competitor Huawei gets into trouble.

With a price that is still below the price at the time of the IPO two years ago and a business model that is similar to that of Apple (only it is growing faster), Xiaomi is on the watch list of all those looking for the ” next Apple ”and also like to invest in Chinese companies.

The post Could this Chinese newcomer be the next Apple? appeared first on The Motley Fool Germany.

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Billy Duberstein owns shares in Xiaomi ADR. Its customers can own shares in the companies mentioned. The Motley Fool owns shares of and recommends Apple stocks.

Billy Duberstein on July 25th, 2020 on Fool.com released. It has been translated so that our German readers can take part in the discussion.

Motley Fool Deutschland 2020

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