The Xiaomi AI Overlooked by the Market

Xiaomi's AI roadmap is being systematically underestimated by the market.

According to Chasing Trading Desk, Barclays pointed out in a Xiaomi Q2 earnings review report released on August 18 that with an ecosystem spanning smartphones, home appliances, wearables, and electric vehicles, Xiaomi is quietly building a differentiated AI application matrix—a strategic value that is almost entirely unreflected in the current share price.

Xiaomi’s total revenue for the second quarter was RMB 108.9 billion, down 6.1% year-on-year but beating Barclays’ expectations by 5.2%. The report maintains an “Overweight” rating on Xiaomi’s US ADR (XIACY) with a target price of $30, suggesting approximately 82% upside relative to the August 17 closing price of $16.45.

The analysts explicitly stated in the report that Xiaomi's AI strategy is “the least recognized aspect by investors.” They believe that Xiaomi's embedding of both large and small models into devices and operating systems, bridging the “person-vehicle-home” full-scenario pathway, is its core competitiveness differentiating it from other AI market players.

Accelerating AI Investment, Ecosystem Synergy as Key Differentiator

Xiaomi’s AI strategy is entering its substantive implementation stage. Its foundational model MiMo-V2.5 has seen widespread adoption on the global developer platform OpenRouter and began generating API and Token revenue starting in Q2, but management emphasized that the current priority remains improving model capabilities and scaling usage, rather than commercialization.

On the product level, Xiaomi launched its new-generation operating system HyperOS 4 and Hyper XiaoAi 2.0, which both support AI agents executing tasks across applications and devices; on the home IoT side, Miloco 2.0 features facial recognition and memory capabilities; in electric vehicles, AI is used to enhance autonomous driving; in robotics, Xiaomi announced Xiaomi-Robotics-U0 and has deployed humanoid robots in manufacturing, though commercialization is still in its early stage.

In terms of capital expenditure, AI-related outlays accounted for nearly 30% of Xiaomi’s total R&D costs in the first half of the year. At the beginning of the year, Xiaomi announced a 2026 AI investment target of RMB 16 billion (with capital expenditure about RMB 5-6 billion and operating expenses about RMB 10 billion), along with a three-year investment plan totaling RMB 60 billion.

Second Quarter Results: Smartphones Under Pressure, EVs Exceed Expectations

The smartphone segment was the biggest drag this quarter. Impacted by a sharp increase in memory prices, Q2 smartphone shipments declined 26.5% year-on-year to 31.2 million units, with revenue falling 7.5% year-on-year to RMB 42.1 billion. However, Xiaomi proactively compressed shipments of mid- and low-end models, driving the average selling price up 25.9% year-on-year to RMB 1,351—a record high—with smartphone gross margin hitting 8.5%, above the company’s original 8% target.

Current memory prices are about five times higher than the same period last year. Entry-level device memory costs have risen to around RMB 1,500, pushing the price of related models above RMB 2,000. Management expects the month-on-month increase in memory prices to slow in Q3 and fall further in Q4.

The electric vehicle business exceeded expectations. Q2 deliveries reached 104,200 units, above the estimated 90,000 units, with the segment’s gross margin at 19.2% and a loss of RMB 2.6 billion. Market attention is focused on the range-extended SUV SkyNomad, scheduled for release in September, which is positioned differently from existing SU7 and YU7 models. Management indicated initial market feedback is positive, but final gross margin will depend on the pricing strategy. Barclays expects full-year EV deliveries to reach 450,000 units in 2026, below the company’s initial target of 550,000 units.

Overseas IoT Expansion Offsets Domestic Subsidy Decline

The IoT and lifestyle products segment saw Q2 revenue decline 19.2% year-on-year, mainly due to the high base effect from large-scale government subsidies in China that started in Q4 2024. Barclays believes this segment is likely to resume year-on-year growth by as early as Q3 2026.

The overseas market is an important counterbalance for the IoT business. Xiaomi has opened more than 640 retail stores outside China and plans to expand to around 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 overseas revenue accounts for around 20%-30% of the IoT segment and carries higher profitability.

Barclays applies a 10x 2027E EV/EBITDA valuation multiple to Xiaomi’s core business (excluding EV) and a 20x multiple to the EV segment, resulting in a per-ADR price target of $30. In a bullish scenario, the two segments are valued at 10x and 25x, respectively, pushing the target price to $34; in a bearish scenario, with 5x and 10x multiples, the target price falls to $16. Barclays slightly lowered its 2026 adjusted net profit forecast to RMB 24.2 billion, mainly reflecting ongoing memory cost pressures, while raising revenue estimates primarily due to the EV segment’s outperformance.