SMARTPHONES: Xiaomi Sits on Cash Pile, Inflated Value
Bottom line: Xiaomi is likely to need new funds around a year from now, at which time its valuation will stagnate or even come down up to 10 percent as its growth continues to slow.
Struggling smartphone maker Xiaomi is making headlines today for what it’s NOT doing, namely planning to raise cash anytime soon. Xiaomi’s lack of cash raising plans are coming from talkative chief Lei Jun, responding to questions about whether his company has lost value since its last mega funding at the height of its meteoric rise about a year ago.
Most of the reports are focusing on Lei’s comments that Xiaomi has no plans for an IPO in the next 5 years, and also that his company has plenty of cash — more than 10 billion yuan ($1.5 billion) to be precise. Both remarks look aimed a deflecting speculation that Xiaomi might have to return to investors soon for more money, an exercise that would force it to put a new value on the company.
Xiaomi was the envy of China’s corporate world in 2014, when sales of its trendy and affordable smartphones surged on a savvy strategy that combined “hunger marketing” with an online-only sales model. The company raised a hefty $1.1 billion in its last funding round at the very end of 2014, valuing it at an impressive $45 billion less than 5 years after its founding.
But Xiaomi’s honeymoon came to an abrupt end last year, as sales growth in its home China market slowed sharply and its highly hyped global expansion failed to offset the domestic slowdown. As a result, the company badly missed its aggressive sales target for last year, and hasn’t publicly discussed its targets for this year, as Lei shifts his focus to a “live in the moment” message.
Now it appears that Lei is continuing that message with his dismissal of any plans for fund-raising in the near future. He made his comments in a press conference on the sidelines of the big National People’s Congress taking place this week in Beijing, where he is acting as an adviser to the government on corporate policy.
Sensitive Stock Markets
Clearly aware that China’s volatile stock markets have become a politically hot issue these days, Lei tried to downplay his comments about a lack of IPO plans in the near term. Instead, he said it was inappropriate to talk about IPOs at this particular time, and simply reiterated some of his previous comments that Xiaomi wouldn’t go public within the next 5 years. (Chinese article)
I recall when Lei first first made those comments, which was probably about 2 years ago when Xiaomi was riding high and everyone was expecting the company to make an IPO even though it was still quite young and losing big money. That would still mean an IPO is probably isn’t going to happen for at least 3 years, at which time Xiaomi should probably at least be profitable.
Lei also said that Xiaomi currently has more than 10 billion yuan in cash, which is a bit more than the amount it raised in its last funding that valued it at about $45 billion. Before the big 2014 funding, Xiaomi had raised an undisclosed amount probably in the $500 million to $1 billion range in 2013, and $200 million in 2012. That would imply the company isn’t burning through money quite as quickly as many like myself had expected.
It’s hard to read too much else into Lei’s brief comments, though they do appear to show that Xiaomi has more than enough cash to last it through the rest of this year. I do suspect that the company’s cash burn rate is probably growing, since it has moved into a number of major new markets such as India and Brazil, and is aiming to move into others this year. That means Xiaomi will probably need to look for new funding around a year from now, at which time it’s almost inevitable its valuation will either stagnate or even possibly come down perhaps up to 10 percent.
