Xiaomi's AI Strategy Overlooked by the Market

Xiaomi's AI layout is being systematically undervalued by the market.

According to Zhuifeng Trading Desk, Barclays pointed out in its Q2 earnings review report on Xiaomi released on August 18 that Xiaomi is quietly building a differentiated AI application matrix leveraging its hardware ecosystem spanning smartphones, home appliances, wearable devices, and electric vehicles—a strategic value that is hardly reflected in the current stock price.

Xiaomi's total revenue in the second quarter was RMB 108.9 billion, a year-on-year decrease of 6.1%, but exceeding Barclays' expectation by 5.2%. The report maintains an "Overweight" rating on Xiaomi Corporation (XIACY), with the target price unchanged at $30, implying an upside of approximately 82% from the closing price of $16.45 on August 17.

Analysts explicitly stated in the report that Xiaomi's AI strategy is "the part least recognized by investors." They believe that Xiaomi's path of embedding large and small models into devices and operating systems, and connecting the full scenario of "human-car-home," is its core competitiveness distinguishing it from other AI participants.

Accelerated AI Investment, Ecosystem Synergy as Key Differentiator

Xiaomi's AI strategy is entering a stage of substantive implementation. Its foundation model, MiMo-V2.5, has gained widespread adoption on the global developer platform OpenRouter and began generating API and Token revenue in the second quarter. However, management emphasized that the current priority remains enhancing model capabilities and expanding usage scale, rather than commercial monetization.

At the product level, Xiaomi launched the new generation operating system HyperOS 4 and Hyper XiaoAi 2.0, supporting AI agents to execute tasks across applications and devices; in the home IoT sector, Miloco 2.0 features face recognition and memory functions; in the electric vehicle sector, AI is used to enhance autonomous driving capabilities; in the robotics field, Xiaomi released the Xiaomi-Robotics-U0 and has deployed humanoid robots in manufacturing facilities, though commercialization is still in its early stages.

In terms of capital investment, AI-related expenditures accounted for nearly 30% of Xiaomi's total R&D expenses in the first half of the year. At the beginning of the year, Xiaomi announced its 2026 AI investment target of RMB 16 billion (with capital expenditures of approximately RMB 5-6 billion and operating expenditures of approximately RMB 10 billion), and formulated a three-year investment plan of RMB 60 billion.

Q2 Performance: Smartphones Under Pressure, EVs Exceed Expectations

The smartphone business was the biggest drag this quarter. Affected by a sharp rise in memory prices, smartphone shipments in the second quarter fell 26.5% year-on-year to 31.2 million units, with revenue decreasing 7.5% year-on-year to RMB 42.1 billion. However, Xiaomi actively reduced shipments of mid-to-low-end models, driving the average selling price up 25.9% year-on-year to RMB 1,351, a historic high. The smartphone gross margin reached 8.5%, higher than the company's original target of 8%.

Current memory prices are approximately five times those of the same period last year, with memory costs for entry-level devices reaching as high as about RMB 1,500, pushing the price range of related models above RMB 2,000. Management expects the month-on-month increase in memory prices to slow down in the third quarter and further decline in the fourth quarter.

The electric vehicle business exceeded expectations. Deliveries in the second quarter reached 104,200 units, surpassing the estimated 90,000 units. The segment gross margin was 19.2%, with a segment loss of RMB 2.6 billion. Market focus has shifted to the extended-range SUV SkyNomad, scheduled for release in September. This model is positioned differently from the existing SU7 and YU7. Management stated that initial market feedback has been positive, but the final gross margin will depend on pricing strategies. Barclays expects full-year 2026 EV deliveries to be 450,000 units, lower than the company's initial target of 550,000 units.

IoT Overseas Expansion Offsets Domestic Subsidy Retreat

Revenue from the IoT and lifestyle products segment decreased 19.2% year-on-year in the second quarter, mainly due to the high base effect formed by large-scale subsidies from the Chinese government starting in the fourth quarter of 2024. Barclays believes that this segment is expected to restore year-on-year growth as early as the third quarter of 2026.

Overseas markets are an important hedging force for the IoT business. Xiaomi has currently opened over 640 retail stores outside China and plans to expand to approximately 1,000 by the end of 2026. Management views physical retail as a key driver for ecosystem penetration, especially for high-end smartphones and high-value IoT products. Barclays estimates that overseas revenue accounts for about 20% to 30% of the IoT segment's income and carries higher profit margins.

Barclays applies a 2027 expected EV/EBITDA multiple of 10x to Xiaomi's core business (excluding EVs) and 20x to the EV business, deriving a target price of $30 per ADR. In an upside scenario, if multiples of 10x and 25x are applied respectively, the target price could reach $34; in a downside scenario, if multiples of 5x and 10x are applied respectively, the target price would drop to $16. Barclays slightly lowered its full-year 2026 adjusted net profit expectation to RMB 24.2 billion, mainly reflecting continued memory cost pressures, while raising revenue expectations, primarily driven by the EV segment.