Xiaomi's Q1 Earnings Exceed Expectations, Demonstrating Fundamental Resilience Amid Memory Cycle

Overview

Bernstein released its review of Xiaomi Corporation's Q1 2026 earnings, maintaining an 'Outperform' rating and HK$43 target price. The report notes that despite short-term headwinds such as rising memory prices, high smartphone base, and EV product cycle reset, Xiaomi's Q1 adjusted net profit exceeded expectations, demonstrating strong fundamental resilience. The firm believes that as the company navigates the memory cycle, its long-term positioning in premiumization, overseas expansion, and AI ecosystem will offer a more attractive risk-reward profile.

Core views

Smartphones and IoT: Dual Drivers of Premiumization and Overseas Expansion. Q1 smartphone shipments declined due to a high base, but ASP reached a record RMB 1,300, driving gross margin to 10.1%, exceeding market expectations. This indicates that rising memory costs accelerated Xiaomi's structural shift toward premiumization. The IoT segment maintained a robust gross margin of 25.2%, with overseas markets performing particularly well, contributing nearly 40% of segment revenue, validating its long-term international expansion logic. Electric Vehicles and AI: Short-Term Pressure, Momentum Recovering. Due to model transitions (SU7 refresh and YU7 preparation), Q1 EV deliveries declined sequentially, with gross margin dropping to 20.2%. However, with the new SU7 securing 80,000 orders within 48 days of launch and the release of models like YU7 GT, Q2 deliveries are expected to rebound significantly to over 120,000 units. In AI, the MiMo-V2.5 model excelled in global benchmarks, with the Token paid plan achieving a 35% retention rate. Leveraging its hardware and OS control, Xiaomi holds significant option value in the Agent AI era.

Analysis framework

The firm employed a Sum-of-the-Parts (SOTP) valuation approach to assess Xiaomi as a diversified tech giant. For mature smartphone and IoT businesses, P/E and EV/EBIT multiples were used; for high-margin internet services, higher P/E and EV/EBIT multiples were applied; while for the growth-stage EV business, DCF, forward P/E, and EV/Sales were cross-validated. This approach avoids distortions from single valuation metrics for diversified businesses, more accurately reflecting the true value and growth stage of each segment.

Methodology notes

• Valuation MethodSOTP Valuation

  SOTP (Sum of the Parts) Valuation

  When a company spans multiple business models or industries with vastly different growth stages (e.g., Xiaomi's hardware, internet, and automotive businesses), overall valuation can be distorted. The SOTP method segments the company into different businesses, applying the most suitable valuation metrics (e.g., P/E for mature businesses, PS or DCF for growth businesses) independently before summing them, providing a fairer reflection of the company's intrinsic value.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Xiaomi Corporation (1810.HK)

  Core analysis target, benefiting from premiumization, overseas expansion, and long-term option value in AI/EV ecosystem.

  Strengths

  Smartphone ASP at record high, strong IoT overseas growth, rapid momentum in AI models and new EV orders.

  Weaknesses

  Short-term memory cost pressures, automotive business in transition phase.

  Risks

  Hardware sales miss, premiumization setbacks, EV quality/recall risks, macro demand weakness, and geopolitical tensions.

Key data

• Q1 Adjusted Net ProfitRMB 6.1 billionExceeded firm expectations of RMB 5.5 billion, net margin of 6.1%
• Smartphone ASPRMB 1,300Record high, up 8.2% YoY
• IoT Overseas Revenue ShareNearly 40%Strong double-digit growth achieved
• Q1 EV Deliveries81,000 unitsUp 6.6% YoY, down 44.3% QoQ due to product cycle reset
• 2026E EPS ForecastRMB 1.02Lowered 3% from prior forecast

Impact & implications

The report believes memory price pressures will persist into Q2 and Q3, but this also accelerates Xiaomi's shift toward premium products, benefiting long-term profitability post-cycle normalization. Meanwhile, short-term automotive challenges are part of the product matrix expansion process. As new models ramp up and the AI ecosystem monetizes, Xiaomi's fundamentals have solidified, with a significantly favorable risk-reward profile over the next 12 months.

Risks

• Hardware sales falling short and premiumization strategy stalling
• Current and future model sales performance, quality issues, and potential recalls
• Macroeconomic weakness leading to subdued domestic and global demand
• Deteriorating industry competition and technological disruption risks
• Unfavorable policy environment and geopolitical tensions

What to watch

• Q2 and Q3 memory price trends and their ongoing impact on hardware margins
• New SU7 and YU7 series production ramp-up and Q2 actual deliveries (expected to exceed 120,000 units)
• Progress in AI Token plan user retention and monetization