Xiaomi Raises $1 Billion, Threatens Apple's Ecosystem

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Includes: AAPL, AMZN, BABA, BIDU, GOOG, GOOGL, YOKU
by: WestEnd511

Summary

Xiaomi completed a $1 billion financing round that values the company at $45 billion.

Extra capital could be used to build Xiaomi's ecosystem and smart-home initiative.

This is a long-term negative to AAPL.

Event

The Wall Street Journal reported (subscription/registration required at link) that Xiaomi raised $1 billion in the latest funding round led by former Morgan Stanley internet analyst, now investor Richard Ji's All Star Investment group. This values the start-up smartphone maker at a whopping $45 billion.

To put this in perspective, this valuation is 4x that of the world's largest PC maker, Lenovo, and makes Xiaomi the second-largest smartphone maker in the world behind Apple (NASDAQ:AAPL). Other investors that participated in the financing include DST Global, Singapore's sovereign wealth fund GIC and Alibaba's (NYSE:BABA) Yunfeng Capital.

Implication

With the additional funding from the private market, Xiaomi is expected to pursue several growth areas to compete against AAPL and high-end Android OEMs in Asia. Since India has largely shut out Xiaomi, and an entry into North America will be challenged by law suits over IP, the company most likely will focus its smartphone growth in China, while looking for strategic acquisitions abroad to strengthen its ecosystem.

In China, investors can expect the company to focus on building its ecosystem centered around its mobile devices, particularly in the area of home appliances, which will be a key focus on Xiaomi to drive wider adoption of its devices. It is evident from Xiaomi's recent purchase of a stake in Midea that the smartphone maker is charting its next growth area. With China's smartphone market becoming increasingly competitive and rapidly maturing, building a smart-home ecosystem makes sense. The company already has a portfolio of TV, set-top boxes and wireless routers, and the next area of growth lies in air conditioning, washers, microwave and home lighting, all of which can be controlled via Xiaomi's mobile devices. As Chinese households enter the smart-home upgrade cycle, the firm stands to be the key beneficiary through its aggressive pricing and value proposition.

Outside of China, wearables and online content will be two areas that will be accretive to Xiaomi's ecosystem. Its investment in Misfit wearables suggests the company is keen on exploring all areas of a mobile ecosystem. I applaud Xiaomi's decision to invest in Misfit, because it could gain valuable insight on enhancing its own wearables initiative. Besides hardware/software, content acquisition will be another focus. Having invested in Youku (NYSE:YOKU), which is the default video provider for Xiaomi's mobile video app, the company is likely to follow BABA's footsteps on securing foreign content to make its platform more attractive to users.

The ultimate result is the further strengthening of its ecosystem, which I view as competitive against AAPL, Google's Android (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon.com (NASDAQ:AMZN) in the long term. Among the three, AAPL faces the biggest risk as Chinese users gradually migrate to Xiaomi's ecosystem due to the superior user experience, while GOOG could hedge this risk by higher volume to emerging markets where Xiaomi is not present. AMZN is not threatened, in my view, given its smaller scale.

Conclusion

I remain bearish on AAPL, despite its 41%+ YTD rally. While I admit my bearish call was early, I would like to point out that AAPL's ecosystem is facing multiple headwinds from emerging hardware players that are creating their own ecosystems. Android has been successful largely on volume, while AMZN is emerging as an ecosystem threat that has the potential to be competitive in North America. Investors should not underestimate the emerging ecosystems from Asia, namely Xiaomi, BABA and Baidu (NASDAQ:BIDU). I expect the market to reflect this reality in the latter part of 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.