ZTE's Smart Projects Fuel Revenue Surge, But Profit Pressures Loom

ZTE Corporation, long a stalwart of China’s telecom infrastructure, is undergoing a transformation. In Q1 2025, the company reported a 7.8% year-on-year revenue increase to CNY 32.97 billion ($4.50 billion), driven by a strategic pivot toward AI-driven “smart projects.” This shift has positioned ZTE as a key player in the global race to dominate emerging tech sectors—from 5G-A networks to AI-powered consumer devices. Yet, behind the growth lurk challenges: a 10.6% decline in net profit to CNY 2.45 billion, signaling the high costs of innovation. For investors, the question is clear: Can ZTE sustain its AI-fueled expansion while navigating financial headwinds?

The AI Engine Room

At the heart of ZTE’s growth is its “second-curve” business, which now accounts for over 35% of revenue. This segment includes intelligent computing, servers, storage, and AI terminals—areas where the company is leveraging its telecom expertise to build out next-gen infrastructure. For instance, ZTE’s servers and storage solutions saw “rapid growth” in Q1, driven by demand from Chinese internet giants and telecom firms. The company’s push into computing power, paired with its traditional connectivity strengths, reflects a deliberate move to capitalize on the convergence of 5G, AI, and edge computing.

But ZTE isn’t just playing in the enterprise space. Its consumer-facing AI terminals—such as the nubia Flip 2 foldable smartphone and the gaming-focused Neo 3 series—are also gaining traction. The “AI Together” initiative, which integrates collaborative AI features into devices, hints at a broader ecosystem play. Meanwhile, ZTE’s smart home solutions, including AI-powered networks, robots, and screens, aim to tap into China’s growing demand for home automation.

The Profitability Puzzle

Despite these gains, ZTE’s net profit fell 10.6% year-on-year, with finance costs rising fourfold. This highlights a critical tension: while AI investments are driving top-line growth, they are also straining margins. The company’s focus on high-growth, capital-intensive sectors like servers and 5G-A technology requires sustained R&D spending. To put this in perspective:

Investors will need to assess whether ZTE can scale its AI businesses to a point where economies of scale offset upfront costs. The domestic market, which contributed 67.6% of 2024 revenue, remains a stabilizing force. However, ZTE’s push into non-aligned international markets—particularly in the global south—adds geographic diversification but also new risks, including regulatory hurdles and currency fluctuations.

The Strategic Bet on 5G-A and Ecosystems

ZTE’s partnership with China Mobile at MWC 2025, showcasing its “Communication-Sensing-Computing-Intelligence” solution, underscores its vision for the future. By merging 5G-A networks with AI-driven sensing and computing, ZTE aims to create platforms for industries like smart cities and industrial IoT. This aligns with global trends: Gartner estimates that AI-driven infrastructure spending will hit $340 billion by 2027, with telecom and enterprise segments leading the charge.

Yet, ZTE faces stiff competition. Huawei, despite U.S. sanctions, remains a formidable rival in 5G and AI, while global players like Ericsson and Nokia are also doubling down on smart infrastructure. For ZTE, success hinges on its ability to balance China-centric growth with global partnerships—without falling into the same regulatory traps that have hampered Huawei.

Conclusion: A Risky, but Rewarding, Bet on the Future

ZTE’s Q1 results reveal a company at a crossroads. Its AI-driven smart projects are clearly resonant: the government and enterprise segment doubled in revenue, while consumer tech like foldables and smart homes are expanding ZTE’s addressable market. The $4.5 billion in Q1 revenue and 35% AI contribution suggest the strategy is working—but profitability remains a sticking point.

Investors should weigh two critical factors. First, ZTE’s valuation: at a forward P/E ratio of ~12 (vs. 18 for Ericsson and 25 for Huawei), it’s cheaper, but that reflects profit volatility. Second, its execution: can ZTE translate AI infrastructure wins into margin improvements? If it can, the rewards are vast—serving as a backbone for industries from manufacturing to healthcare. If not, the rising costs could crimp growth just as competitors accelerate.

For now, ZTE’s narrative is one of progress, not perfection. The stock’s performance since 2023—up 22% despite profit pressures—suggests the market is betting on its long-term potential. But as ZTE’s CEO noted, “The next five years will determine who leads the AI era.” For shareholders, the path is clear: support innovation, but demand discipline.