Can Xiaomi's EV Push Sustain Growth Amid Smartphone Decline and EV Risks? (SEHK:1810)

Xiaomi's core cash engine is weakening. Smartphone revenue dropped 3.1% year-over-year to RMB46 billion in Q3 2025, despite remaining the company's largest single segment at 40.6% of total sales. This decline is squeezing margins, with smartphone profitability slipping to just 11.1%. Rising memory costs and intense competition are forcing tough choices, including planned price hikes that risk slowing sales further.

While the smartphone division still fuels most of Xiaomi's cash flow, its downward trend is becoming harder to ignore.

The new EV business hit a major milestone with its first operating profit of RMB700 million and a strong 25.5% gross margin according to financial reports. Volume growth from higher vehicle deliveries drove its revenue up to RMB28.3 billion, now 25.5% of the company's total. However, this segment faces material shortages and supply chain delays, adding friction to its promising start. Brokerages have already cut forecasts, wary of eroding EV margins under competitive pressure and shifting tax incentives, while Xiaomi's stock reacted negatively to the earnings report.

For now, the EV unit's growth is offsetting smartphone weakness but hasn't replaced it as the primary cash generator. Smartphone sales remain the bedrock of Xiaomi's liquidity. The EV business's cash flow trajectory is still volatile, hindered by input costs and production constraints. Executives are prioritizing EV volume expansion over near-term profitability, investing heavily in R&D to support this pivot. While AI integration and premiumization offer long-term upside, investors should watch for smartphone erosion accelerating and EV margins stabilizing above current levels.

EV Business Risks: Production, Market Share, and Regulatory Barriers

Despite tripling its EV revenue to 28.3 billion yuan in Q3 2025, Xiaomi faces mounting operational and market challenges. Production delays and safety concerns are directly hampering vehicle deliveries according to industry analysis, creating friction in scaling output. Margin erosion is accelerating, with brokerages cutting 2025-2026 forecasts due to intense competition and tax incentive pressures, compounded by semiconductor cost increases.

Weak post-incentive demand is evident in divergent analyst targets, ranging from HK$56.50 (Goldman Sachs) to HK$69.00 (CLSA), reflecting diminished confidence. Promotional campaigns have failed to reverse sales stagnation, while investor sentiment soured-a 4.8% stock decline post-earnings coincided with growing bearish positions from hedge funds and pension funds. These headwinds threaten cash flow sustainability despite the EV segment's rapid revenue growth.

Valuation Stakes and Downside Catalysts

Valuation pressure is mounting as Xiaomi faces headwinds in its core smartphone business and troubled EV expansion, forcing investors to reassess the stock.

The company's stock plunged over 4.8% after Q3 results revealed smartphone revenue slid 3.1% to 46 billion yuan, overshadowed by EV growth that couldn't offset the decline. Brokerages like Bocom and Huatai cut 2025-2026 forecasts, citing intensifying competition, margin compression, and tax incentive uncertainties. These downward revisions highlight valuation vulnerability as traditional hardware revenue falters while EV segment scalability remains unproven.

Ahead of November 18 earnings, analyst sentiment is sharply divided. Goldman Sachs slashed its target to HK$56.50, driven by semiconductor cost pressures and weak EV demand that sparked bearish bets from institutional investors. Yet CLSA holds a HK$69 "Buy" rating, betting on long-term AI/cloud momentum despite recent promotional efforts failing to counter near-term challenges. While the median price target suggests 55% upside, this optimism rests on unproven EV execution and assumes smartphone recovery – risks that could trigger rapid reassessment if quarterly results disappoint.