Xiaomi IPO Countdown: Is This the Next Alibaba?

The hottest initial public offering (IPO) of 2015 could likely come from a company you haven't yet heard of...

Xiaomi Corp. is a Chinese tech company founded in 2010. By the end of this year, talk of a Xiaomi IPO will reach a fever pitch. The company has made incredible progress in its brief existence.

Xiaomi launched its first smartphone in 2011. By the third quarter of 2014, Xiaomi became the third-largest smartphone vendor in the world. It beat out such veterans as LG Electronics Inc. and Lenovo Group Ltd. (OTCMKTS ADR: LNVGY).

The company's astonishing growth is why so many expect a Xiaomi Corp. IPO within the year.

Xiaomi IPOXiaomi Chief Executive Officer Lei Jun announced last weekend that 2014 revenue had more than doubled from the previous year, from $5.2 billion to $11.97 billion. That was up some 150% from 2012 revenue of $2 billion.

Phone sales have soared from 7.19 million units in 2012 to just over 61 million in 2014. Xiaomi expects to sell 100 million smartphones this year. To put that into context, Apple Inc. (Nasdaq: AAPL) sold 169.22 million iPhones in its 2014 fiscal year.

That's why venture capitalists are investing in Xiaomi with abandon...

Venture Capitalists Investing in Xiaomi Corp.

The company raised more than $1 billion last month in its latest round of funding. Xiaomi Corp. is now valued at $45 billion. That puts it ahead of Uber Technologies Inc. ($41 billion) and Airbnb Inc. ($10 billion).

Russian billionaire Yuri Milner, who invested in Facebook Inc. (Nasdaq: FB) back in 2009, thinks Xiaomi's valuation could hit $100 billion. Milner's DST Global has been investing in Xiaomi since 2012.

"I was attracted by the size of the opportunity ahead of them," Milner told Bloomberg last month. "I don't think there's any company that has reached $1 billion in revenue as fast as Xiaomi. In every conceivable benchmark, it's almost unprecedented in terms of its speed of growth."

While it has made no formal IPO announcement, the South China Morning Post reported in November that the company is studying its options. And the success of the Alibaba Group Holding Ltd. (NYSE: BABA) IPO last September could not have escaped the notice of Xiaomi brass.

Given the company's crazy growth and the rising investor interest in Chinese companies, a Xiaomi IPO is a sure thing.

As with Alibaba, a Xiaomi IPO would offer a great opportunity for investors. The impressive numbers only tell half the Xiaomi story.

Here's why it stands out from the crowd of up-and-coming Chinese tech companies...

The Xiaomi IPO: What Makes This Company Special

Xiaomi phones are not just low-cost like other Android-powered phones. They're also well-designed and just as powerful as pricier rivals. For example, the Xiaomi Mi4, which bears an uncanny resemblance to the iPhone 5s, sells for about $300 in China. At $730, the iPhone 5s costs more than twice that.

Of course, Apple isn't happy about it.

"I think it's theft and it's lazy," Apple design chief Jony Ive said at a Vanity Fair summit last fall. But Chinese consumers love the premium designs at a bargain price.

Apple is often mentioned in discussions about Xiaomi. That's because Xiaomi wants very much to be the Chinese version of Apple. In fact, pundits refer to it as the "Apple of China."

CEO Lei Jun even dresses in the Steve Jobs style of jeans and black shirts. At a product unveiling last year, Jun even cribbed Jobs' famous "one more thing" catchphrase.

And like Apple, Xiaomi makes related devices like tablets, a television set-top box (which looks a lot like an Apple TV) and a fitness band. It also has a cloud service, MiCloud, and a messaging service, MiTalk.

But most importantly, all of these things are linked together by MIUI, Xiaomi's distinct version of Google Inc.'s (Nasdaq: GOOGL, GOOG) Android operating system. Because it's open-source, any vendor can customize it as they see fit.

That means Xiaomi is essentially building its own ecosystem of products and services. That's exactly what makes Apple so phenomenally successful.

And Xiaomi has already branched out from China. It also sells its wares in places like Malaysia, the Philippines, India, and Indonesia. The company web site declares "we are ready to go global."

But if Xiaomi truly wants to match Apple, it needs to do more than just mimic its idol.

What Xiaomi Corp. Needs to Fix

While copying Apple has worked well in China and other parts of Asia, that strategy will run into trouble in markets in Europe and North America.

And by trouble, we mean patent trouble.

It's already started in India. Xiaomi is in the middle of a legal tussle there with Ericsson (Nasdaq: ERIC), the Swedish telecom company. Ericsson claims Xiaomi's phones violate several of its patents.

If Xiaomi fails to pay Ericsson the licensing fee it wants, the court likely will force the Chinese company to suspend sales in India.

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And one can only imagine what Apple might do. Apple has waged a costly patent war for years against Samsung and other Android phone makers.

That means Xiaomi's continued success depends on whether it can transition from copycat to innovator - the one Apple trait that has eluded the Chinese upstart.

You see, dodging patent lawsuits isn't the only problem with being a copycat. Xiaomi's current business model of selling quality products at bargain basement prices also has left it with razor-thin profit margins. By one estimate, Xiaomi's margins are just 1.8%.

Apple's profit margins range between 35% and 40%. Customers the world over are willing to pay more for Apple's innovation.

The good news is that Xiaomi does seem to have a strategy for growth beyond smartphones. It has spent $600 million just since November buying up smaller companies to give it a beachhead in the "smart home" market.

The smart home is part of the lucrative Internet of Things market. The IoT is thought to be the "next big thing" in tech following the transition to mobile, now nearly complete.

"Xiaomi is expanding into the smart home and following the lead of Apple, Samsung, and others," Neil Mawston, executive director of researcher Strategy Analytics, told Bloomberg. "We expect Xiaomi to build an ecosystem of Mi devices and apps for the home, office, and car."

With 85 million people already using the MIUI, Xiaomi has an IoT foundation to build on. Whether it can innovate enough to properly exploit it is the question.

But give Xiaomi credit for having ambition.

And such big dreams almost make a Xiaomi IPO a necessity. Corporate empire-building requires a lot of capital, you know.

The Bottom Line: Xiaomi Corp. is clearly one of China's most promising young companies. It's phenomenal growth and big ambitions mean a Xiaomi IPO is almost certain in 2015. The only threat to long-term success is the lack of innovation. If Xiaomi can address that shortcoming, it can become a global tech titan.

 

Apple Outlook in 2015: While Xiaomi remains an Apple wanna-be, the real thing will have another record year. Between the iPhone 6, the Apple Watch, and a more powerful ecosystem that includes Apple Pay, the Cupertino, Calif.-based tech powerhouse will rake in profits at a rate that will keep AAPL stock moving up. Here's the breakdown of what's fueling this bullish Apple stock forecast for 2015...

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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