In the fast-paced world of global technology, hardly any corporate transformation is observed as closely – and with as much skepticism – as the strategic realignment of Beijing-based giant Xiaomi Corporation. Under the visionary leadership of founder Lei Jun, the company has significantly evolved from its traditional role as a value-oriented smartphone manufacturer, creating a closed ecosystem that it itself calls “Human x Car x Home.” However, the stock markets have mercilessly evaluated this risky shift over the past twelve months.
On the Hong Kong Stock Exchange, Xiaomi’s Class B ordinary shares (01810.HK) closed at HK$21.42 on June 26, 2026. This represents a drastic decline of 58.8% from approximately HK$52.00 in June 2025 and a significant correction from the multi-year high of HK$59.46 at the end of September 2025. Since the beginning of 2026 at HK$40.21, the stock has lost approximately 46.7% of its value. This highlights the growing discrepancy between the company’s ambitious structural goals and the harsh realities of short-term cyclical headwinds.
The Legacy Engine Under Fire: The Memory Shortage
The main reason for the current market reluctance lies in the drastic margin reduction in Xiaomi’s traditional cash cow: the smartphone business. For years, hardware served as an efficient tool for customer acquisition and funded investments in software and service platforms. Today, this engine is under pressure due to a sharp and sustained price increase in memory components.
Global contract prices for DRAM and NAND flash memory have risen astronomically, driven by hyperscale cloud service providers signing long-term contracts extending into 2027 and 2028. In response to these sharply rising input costs – as memory suppliers shift capacity to higher-margin AI servers – the gross profit margins of Xiaomi’s smartphones are under significant downward pressure.
The group’s response, as highlighted during the Q1 2026 earnings call, was tactical rather than reactive. Instead of passing on cost increases linearly to consumers, which would have jeopardized market share in price-sensitive emerging markets, Xiaomi proactively reduced shipments of its mid-range and entry-level devices. As a result, smartphone shipments in Q1 2026 fell by 19% year-on-year to 33.8 million units.
While this defensive optimization of the product mix successfully drove the average selling price (ASP) up by 8.2% year-on-year to a record high of RMB 1,310 and secured the smartphone gross margin at a robust 10.1%, it came at the expense of absolute economies of scale. With DRAM and NAND prices expected to rise by another 40% to 60% quarter-on-quarter in Q2 2026, the smartphone gross margin is likely to bottom out at around 8.0%. This would limit the growth of traditional earnings precisely during the company’s most capital-intensive phase.
Domestic Pressure and the Aftermath of Subsidies
Another burden on the group’s earnings was the Internet of Things (IoT) and Lifestyle division. In fiscal year 2025, this segment benefited from strong domestic demand driven by a government subsidy program for household appliances in China. The expiration of these subsidies at the end of last year led to a drastic slump in domestic demand and thus a significant decline in domestic IoT revenues. In Q1 2026, the IoT and Lifestyle segment’s revenues amounted to RMB 24.7 billion, a 23.7% year-on-year decrease.
Despite strong domestic demand, the segment’s fundamental metrics attest to structural strength. The division achieved a solid gross margin of 25.2%, serving as an important profitability buffer to offset the volatility of the smartphone segment. This resilience was primarily driven by record IoT revenues abroad, which grew double-digits year-on-year and now account for approximately 40% of the segment’s total revenue. Management remains optimistic, pointing out that the total addressable market (TAM) for premium devices abroad is up to four times larger than the Chinese domestic market. In the short term, however, growth is likely to remain subdued due to the consolidation of the domestic consumer goods market.
Smart Electric Vehicles: Hypergrowth with Concurrent Losses
The greatest growth opportunity for long-term investors lies in the Smart Electric Vehicles division. With over 411,000 units delivered in its debut year 2025, the automotive segment has rapidly developed into a key component of the company’s identity. However, the first half of 2026 brought seasonal and operational bottlenecks.
In Q1 2026, vehicle deliveries normalized to 80,856 units. This quarter-on-quarter decline was primarily due to model changes, as Xiaomi temporarily halted deliveries of older configurations to prepare for the launch of the revised next-generation SU7 and two new variants of the YU7 SUV. The temporary decline in delivery volume led to a significant loss of operating leverage and an operating loss of RMB 3.1 billion in the segment for the quarter. Furthermore, the gross margin of the Smart EV and new initiatives division fell to 20.1%, burdened by rising raw material costs and the elimination of purchase tax subsidies that had boosted deliveries at the end of 2025.
Management has reaffirmed its ambitious annual target of 550,000 vehicle deliveries for 2026. While the launch of the high-performance YU7 GT model (price: RMB 389,900) and the standard SU7 version is expected to support sales volumes and average prices in the second half of the year, achieving this goal requires flawless execution with a delivery rate of over 55,000 units per month for the remainder of the year. As the planned market entry into Europe is not expected until the end of 2027, the independent profitability of the automotive business is still a long way off.
AI Optionality and Balance Sheet Protection
For patient investors, Xiaomi’s true value may lie in its massive investments in research and development in edge AI and robotics. The company forecasts expenditures of over RMB 16 billion for AI in 2026, which alone represents a 33.4% year-on-year increase in total R&D expenses to RMB 8.95 billion in Q1.
The technical milestones are impressive. The proprietary MiMo-V2.5-Pro base model currently ranks first in the comprehensive intelligence index among global open-source models. Xiaomi has successfully launched commercialization with structured MiMo token packages (from Light to Max), which achieved a weekly customer retention rate of 35% after the test phase. Furthermore, the integration of the MiClaw agent on tablets, PCs, and smart displays underscores the growing monetization potential of the global user base of over 754 million monthly active users.
Crucially, this long-term investment cycle is supported by an exceptionally strong balance sheet. Xiaomi has cash and cash equivalents of RMB 66,582 million against long-term interest-bearing liabilities of only RMB 25,007 million. This corresponds to a strongly negative net debt ratio (net debt/EBITDA) and a conservative gross debt ratio of only 7.1%. Thanks to this strong liquidity reserve, the company was able to implement an extensive share buyback program, investing approximately HK$8.4 billion by 2026. This provides strong technical support for the stock.
iMaps Conclusion
At a current price of HK$21.42, Xiaomi Corporation represents a classic example of the conflict between long-term investment opportunities and short-term cyclical realities. We rate the stock NEUTRAL. At this level, the flawless execution of the “Human x Car x Home” ecosystem and the successful premiumization of the smartphone sector are highly commendable industrial achievements. However, the structural increase in component costs is likely to limit the growth of traditional earnings until 2027, while the Smart EV division will continue to generate losses in a highly competitive domestic market.
Although a sum-of-the-parts valuation suggests a target price of HK$35.00 to HK$41.30 after the capital-intensive phase of the automotive industry transformation is complete, the stock lacks positive short-term catalysts. We therefore advise investors to wait for signs of stabilization in component costs and significant progress towards EV profitability without further investments before building aggressive positions.
