Xiaomi Corp: EV Growth Emerges as Critical Driver Amid Severe Smartphone Margin Erosion

Core Conclusion

Xiaomi's 4Q25 results confirm a critical inflection point: explosive EV growth is now structurally offsetting weakness in core smartphone and AIoT segments, but severe smartphone margin compression from memory cost inflation has led to a material decline in overall profitability. The investment narrative for 2026 hinges entirely on EV execution, specifically new model SU7 order flow, against a backdrop of persistent smartphone margin headwinds.

Evidence Chain

EV Segment Has Become the Primary Growth Engine. The EV business is no longer a future project but a present-scale driver, contributing 31.8% of total revenue in 4Q25. Revenue surged 123% YoY to Rmb 37.2bn, exceeding estimates by 2%. This growth single-handedly pushed total quarterly revenue to a record high despite smartphone revenue declining 14% YoY. The investment implication is clear: EV's scale now provides a fundamental offset to traditional business cyclicality, shifting the valuation framework.

Smartphone Gross Margin Faces Severe and Persistent Pressure. Structural cost pressure, not just demand weakness, is crippling the smartphone unit's profitability. Smartphone gross margin contracted 3.8 ppts YoY and 2.8 ppts QoQ to 8.3% in 4Q25, directly attributed to surging memory costs. Critically, the magnitude of memory cost increases in 1Q26 is noted as greater than expected, indicating this headwind will persist for coming quarters. This erosion undermines the core profit foundation faster than the market anticipated.

Overall Profitability Deteriorates Despite Record Revenue. The cost shock translated directly to the bottom line, demonstrating limited near-term offsets. Adjusted net profit fell 24% YoY and 44% QoQ to Rmb 6.3bn. The adjusted net margin contracted 2.2 ppts YoY to 5.4%, even as revenue grew 7% YoY. This divergence between top-line growth and profit collapse underscores the severity of the margin hit and validates concerns over near-term earnings trajectory.

Internet Services, Especially Overseas, Provide a Resilient Profit Cushion. The high-margin internet segment offers a stabilizing counterweight. Total internet revenue grew 6% YoY to Rmb 9.9bn, with overseas internet services revenue rising 19.5% YoY. Overseas services now account for a record 36.9% of total internet revenue, enhancing the quality and durability of this cash flow stream. This segment's resilience is crucial for funding growth initiatives and partially absorbing shocks from the hardware businesses.

Key Divergences and Risks

The key market mispricing lies in underestimating the duration and impact of memory cost inflation on smartphone profits, while also underappreciating the scale at which EV contributions can now alter the consolidated growth and margin profile. The primary investment risk is a failure of the new SU7 model to generate sustained order momentum, which would remove the essential rerating catalyst as smartphone profits remain under pressure. A secondary risk is smartphone margin compression extending deeper into 2026 due to ongoing supply chain cost dynamics.

Valuation and Trade Implications

The investment thesis presents a clear dichotomy. Short-term (1H26) earnings are shackled by the known and continuing smartphone margin erosion, creating a floor or ceiling for the stock. Any material rerate higher is now exclusively contingent on EV business performance—specifically, the market reception and order book for the new SU7 model and the subsequent gross margin trajectory. Investors should focus monitoring efforts on EV delivery metrics and commentary, rather than on the fully anticipated weakness in the smartphone unit.

Appendix Data Summary

Exhibit 1: 4Q25 Key Segment Performance

Exhibit 2: Profit Trend Adjusted Net Profit: Rmb 6.3bn in 4Q25 (Down 24% YoY, Down 44% QoQ). Adjusted Net Margin: 5.4% in 4Q25 (Down 2.2 ppts YoY).