All Financial Wisdom
Xiaomi’s IPO: a History of Ups and Downs
Xaomi just went public. It has come a long way, both in the short term as its stock has recovered, as well as during its 8 year history.The founder of Xiaomi, Lei Jun, created the company in the spring of 2010. They launched was the Mi-One, more than a year later.
The way mobile devices were marketed early on reminds a bit of OnePlus, but very focused on China: a lot of expectation, very tight prices, a reservation system and the creation of a strong community around it.
And so it has been until they have expanded the range of products: they are no longer a manufacturer of phones inspired by Apple. They have everything from electric scooters to rice kettles. And stores all over the world.
Not everything has been rosy
In 2016, they had an important blip. Many competitors emerged, and increasingly powerful ones at that. So much so that Xaomi was no longer the gold standard in China, but rather, others like the giant Huawei or the more mobile-focused Vivo and OPPO shadowed them. And Apple was hot on their heels.
China is a very large market but also a very competitive one. Xiaomi decided then to change strategy. On the one hand, it focused on marketing. And on the other, it decided to acquire patents in order to protect themselves.
A history of valuations
Knowing the valuation of a company that is not publicly traded is complicated. If there are no capital increases, only the revenue and the margins can be used to determine an estimated price.
On the other hand, if there are financing rounds, which are usually private in the first moments of a company’s life, they can be valued. Investors value the company and put money at that price in exchange for a share in it. So the company has capital to keep growing.
In the beginning, Xiaomi grew fast, in 2013 it was said that it was worth $10 billion dollars and in December 2014 46 billion dollars. Spectacular growth, driven by astronomical sales (12 billion dollars in 2014) although they did it with small margins.
However, the 2016 slump was hard. Sales were barely above 10 billion dollars. And therefore, their valuation was reduced. But in 2017, with international sales taking off, particularly in India, sales grew by 67% to $18 billion dollars. Paradise, right?
Now that things are going well, it’s time to go public and forget the problems of the past. The valuation of 2014 is very far, but it is a reference, because investors put in $1.1 billion dollars and they will want a return.
For the CEO of the company, which has guided it since its inception, this assessment has always been a problem, because it was very high and set tremendous expectations. Do not forget that investors in startups expect returns of at least 10X, since their investment carries a risk and must compensate for failures.
The time of the IPO is not ideal either. The trade war between the US and China has caused the Asian stock markets to collapse. Therefore, and despite the spectacular figures of 2017, Xiaomi will start trading at a reasonable price, in the low range of the initial valuation.
That is, Xiaomi will start trading at 54 billion dollars, far from their initial target. This will allow it to raise $4.7 billion dollars to continue its international expansion.
It seems like a failure, but it is not. This IPO will be the largest in China since Alibaba, and larger than that of Google’s in 2004. And, honestly, to create a company that ids worth over $50 billion dollars in only 8 years is a success in my book.
And now that?
Going public does not have to mean big changes for a company. For the tech media, this is good news, since the revenues and profit margins are public and not a mere trickle of rumors. And for the company it is a clear and continuous indicator of how they are doing it.
Of course in the short term there is a great novelty and that is that they will have new capital to continue their international expansion. They also have a tool to raise money if they need it, without needing to go looking for private investors.
In the long run, listed companies have more relevance, and adapt better to changes, because they always have an indicator of how they are doing. Of course, there is always the risk that key employees leave the company now that they can make their investment liquid. But it does not seem that it will be the case regarding the most important person at Xaomi, its CEO.