Memory Prices and AI Investment Hit Xiaomi's Profit in the Near Term

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its Internet of Things, or IoT, products to help build this ecosystem. During its IPO in 2018, the company committed to limiting its margins on hardware products (smartphones and IoT) to 5%, but in 2019, it started a premiumization strategy, helped by Huawei pulling out of the market, and has been increasing its mix of higher-end products ever since. We expect this pivot toward higher-end products to continue over the next four to five years as it helps revenue growth and increases gross margins.