Xiaomi is really good, but it is also really expensive! Another Wall Street major has downgraded Xiaomi's rating

Xiaomi's stock price has recently surged, but JP Morgan has downgraded its rating from "Overweight" to "Neutral."

JP Morgan believes that Xiaomi's fundamentals remain strong, but the stock price has fully reflected the market's optimistic expectations for accelerated growth in the electric vehicle business, increased market share in smartphones and IoT, as well as new businesses such as smart glasses, robotics, and AI. On March 19, Xiaomi's Hong Kong stock opened lower but rose to HKD 58.85 by the time of publication.

JP Morgan believes that Xiaomi's current valuation level leaves almost no room for surprises in the market, with a current 12-month forward price-to-earnings ratio of about 40 times, close to historical peaks, second only to Chinese tech giants like Tencent and Alibaba, and exceeding BYD by about 17%.

Previously, UBS published a research report, also stating that Xiaomi's valuation already includes the most optimistic expectations, and production capacity may limit the explosive growth of the electric vehicle business. UBS believes:

After a nearly 60% increase this year, Xiaomi's valuation has fully reflected its future growth potential. There are catalysts for further stock price increases, but the execution conditions required are extremely stringent.

Electric Vehicle Business Valuation Reflects 1.75 Million Units by 2030

According to calculations by JP Morgan analysts, excluding core business and cash value, Xiaomi's current stock price implies that its electric vehicle business will reach 1.75 million units by 2030 or 3.5 million units by 2035, which is more than five times the expected shipment volume for 2025. This expectation essentially assumes that Xiaomi's electric vehicle business will execute perfectly, leaving almost no room for error.

In contrast, Tesla took 15 years to reach about 1.8 million units, while BYD is expected to reach about 4.3 million units in 2024. From a valuation perspective, Xiaomi's electric vehicle business has become the second most expensive electric vehicle manufacturer in the world after Tesla, with a market value exceeding BYD by 17%, and is significantly higher than other pure electric vehicle manufacturers in China such as Li Auto, XPeng, and Seres.

Excellent Hardware Company but Lacks Platform Economy Characteristics

As a hardware company, Xiaomi excels in supply chain expertise and consumer brand appeal, successfully replicating its success in multiple hardware categories such as white goods, kitchen appliances, smart home devices, and surveillance, gaining market share in China and entering overseas markets. Its early success in the electric vehicle sector also proves this point However, JP Morgan believes that Xiaomi has not yet been able to create a strong platform economy and a substantial service revenue base like Apple or Tencent. In 2024, the internet services business is expected to contribute only 9% of Xiaomi's total revenue and 34% of gross profit. It is anticipated that the contribution from internet services will remain limited in the next 3-5 years, as hardware business growth will still be the main driver. Therefore, the current price-to-earnings ratio of up to 40 times may be difficult to maintain in the medium to long term.

Xiaomi continues to gain market share in the high-end smartphone sector, and its IoT business maintains healthy growth, benefiting from consumer subsidies and expansion into high-margin categories such as white goods. JP Morgan expects smartphone revenue to grow by 20% in 2025, but it may slow down by 2026 as the impact of consumer subsidies in 2025 diminishes. Internet services revenue growth remains slow, and core earnings are expected to maintain moderate growth in the next 2-3 years.