Xiaomi's artificial intelligence strategy is being systematically undervalued by the market, according to a recent analysis that highlights a significant disconnect between the company's technological progress and its stock price performance.
Barclays' second-quarter earnings review for Xiaomi Corp., published on August 18, underscores that the company is quietly constructing a differentiated AI application matrix through its expansive hardware ecosystem spanning smartphones, home appliances, wearable devices, and electric vehicles. The investment bank argues this strategic value is almost entirely absent from the current share price.
Xiaomi reported total second-quarter revenue of RMB 108.9 billion, a year-on-year decline of 6.1%, yet this figure surpassed Barclays' expectations by 5.2%. The firm maintains its Overweight rating on Xiaomi Corp. American Depositary Receipts (XIACY) with a price target of $30, implying roughly 82% upside from the August 17 closing price of $16.45.
Analysts explicitly identify Xiaomi's AI strategy as the "most underappreciated aspect" for investors. They contend that embedding both large and small language models across devices and operating systems, while connecting the full "human-vehicle-home" scenario, constitutes the company's core competitive edge distinguishing it from other AI players.
Accelerating AI Investment with Ecosystem Synergy as the Key Differentiator
Xiaomi's AI strategy is entering a phase of substantive implementation. Its foundational model MiMo-V2.5 has gained widespread adoption on the global developer platform OpenRouter, beginning to generate API and token revenue in the second quarter. However, management emphasizes that the current priority remains enhancing model capabilities and expanding usage scale rather than pursuing commercial monetization.
On the product front, Xiaomi launched its next-generation operating system HyperOS 4 alongside Hyper XiaoAi 2.0, enabling AI agents to execute tasks across applications and devices. In the home IoT segment, Miloco 2.0 incorporates facial recognition and memory functions. For electric vehicles, AI is being leveraged to enhance autonomous driving capabilities. In robotics, the company unveiled Xiaomi-Robotics-U0 and has deployed humanoid robots within its manufacturing facilities, though commercialization remains nascent.
Financial commitment to AI is substantial, with related expenditures accounting for nearly 30% of total R&D spending in the first half of the year. Xiaomi announced earlier this year an AI investment target of RMB 16 billion for 2026, comprising approximately RMB 5-6 billion in capital expenditure and RMB 10 billion in operating expenses, supported by a three-year RMB 60 billion investment roadmap.
Q2 Performance: Smartphone Pressure Offset by EV Surprise
The smartphone segment proved the quarter's largest drag. Amid sharply higher memory prices, second-quarter smartphone shipments declined 26.5% year-on-year to 31.2 million units, with revenue falling 7.5% to RMB 42.1 billion. Nevertheless, Xiaomi's deliberate strategy to curtail low-to-mid-tier device volumes drove average selling prices up 25.9% year-on-year to a record RMB 1,351, achieving an 8.5% gross margin for smartphones, exceeding the company's original 8% target.
Current memory prices are approximately five times higher than the same period last year, pushing memory costs for entry-level devices to roughly RMB 1,500 and elevating related model price points above RMB 2,000. Management anticipates memory price increases will moderate sequentially in the third quarter and further ease in the fourth quarter.
The electric vehicle business exceeded expectations, delivering 104,200 units in the second quarter against an estimated 90,000, with segment gross margin at 19.2% and a segment loss of RMB 2.6 billion. Market attention now shifts to the extended-range SUV SkyNomad scheduled for September launch, which is positioned distinctly from the existing SU7 and YU7 models. Management reports positive initial market feedback, though final gross margins will hinge on pricing strategy. Barclays projects full-year 2026 EV deliveries of 450,000 units, below the company's initial target of 550,000.
IoT International Expansion Offsets Domestic Subsidy Retreat
The IoT and lifestyle products segment saw second-quarter revenue decline 19.2% year-on-year, primarily due to the high base effect created by substantial government subsidies implemented from the fourth quarter of 2024. Barclays believes this segment could resume year-on-year growth as early as the third quarter of 2026.
Overseas markets serve as a crucial counterbalance for the IoT business. Xiaomi has 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, particularly for premium smartphones and high-value IoT products. Barclays estimates overseas revenue accounts for roughly 20-30% of the IoT segment, carrying higher profit margins.
Barclays values Xiaomi's core business (excluding EVs) at 10 times expected 2027 EV/EBITDA and the EV business at 20 times, yielding a per-ADR price target of $30. In an upside scenario, applying 10 times and 25 times multiples respectively would generate a target of $34; in a downside scenario, 5 times and 10 times multiples would reduce the target to $16. The firm has modestly trimmed its 2026 full-year adjusted net profit forecast to RMB 24.2 billion, reflecting persistent memory cost pressures, while raising revenue expectations driven by the EV segment.
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