Xiaomi Shares Drop To New Low, as Analyst Makes Bearish Downgrade

Xiaomi shares (HKG: 1810) are sliding sharply today, following a disappointing first-quarter earnings report and a high-profile broker downgrade that cast doubt on the company’s ability to navigate surging component costs.

The Xiaomi share price closed down 4.57% at HK$28.40 in Hong Kong trading, extending a brutal twelve-month decline that has seen the stock lose more than half its value from July 2025 highs above HK$61. The drop came as markets digested both weaker-than-expected quarterly results and Jefferies’ decision to downgrade the stock to Underperform from Hold, with a reduced price target of HK$25.49, implying further downside of roughly 10% from current levels.

The sell-off was not helped by broader sentiment, with the Hang Seng Index down 1% on the day, marking a significant reversal for a stock that had been a darling of the Hong Kong market during the pandemic recovery, when Xiaomi’s diversification into electric vehicles and artificial intelligence captured investor imagination. Now, with the company’s core smartphone business under acute pressure, markets are reassessing whether Xiaomi’s strategic pivot can offset near-term margin compression quickly enough to justify even today’s depressed valuation.

Why are Xiaomi Shares Down?

Xiaomi’s first-quarter 2026 results revealed the depth of challenges facing the world’s third-largest smartphone maker. The company reported revenue of approximately RMB 99.1 billion, down 11% year-over-year, the first revenue decline in nearly three years. More troubling was the profit picture: net income plunged roughly 57% to RMB 4.7 billion, worse than the 52% decline analysts had penciled in. Operating profit, or EBIT, collapsed by approximately 70%, falling well below consensus estimates and triggering immediate concern about the sustainability of Xiaomi’s smartphone margin targets.

The primary culprit behind the profit collapse is a dramatic spike in memory chip costs. DRAM and NAND flash prices have roughly doubled in recent quarters, driven by supply constraints and surging demand from AI data centers. Whilst this has been hugely positive for firms such as SanDisk, and Micron, for smartphone makers like Xiaomi, memory components now account for 30% to 40% of the bill of materials, up from a historical 10% to 15%, and in some cases approaching 50% of total device cost. This “memory cost super-cycle” has proven impossible for handset manufacturers to fully pass through to consumers, particularly in the mid-range and budget segments where Xiaomi derives much of its volume.

Jefferies analyst commentary accompanying the downgrade highlighted the squeeze facing Xiaomi’s smartphone division. The firm noted that management is still targeting an 8% gross margin for the smartphone business while projecting a 10% revenue decline for full-year 2026. Jefferies described these targets as “challenging” given the 100% memory price increases observed in the second quarter, suggesting that further estimate cuts may be necessary if cost pressures persist or intensify.

Beyond smartphones, Xiaomi’s electric vehicle ambitions continue to scale rapidly but remain a net drag on consolidated profitability. The EV division generated approximately $2.8 billion in first-quarter revenue, up more than 5% year-over-year, as the company ramps production of its SU7 sedan and related variants. Management is reportedly targeting around 550,000 EV deliveries in 2026, well above earlier internal projections of 410,000 units. However, the aggressive volume push has come at the expense of margins, with Goldman Sachs recently trimming its Xiaomi price target to HK$40 from HK$41 specifically due to lower expected gross profit margins in the EV segment as the company introduces more competitively priced trims.

The company’s Internet of Things and internet services businesses continued to grow in the quarter and helped limit the damage from smartphone and EV pressures. Xiaomi is also investing heavily in artificial intelligence, with public commitments of at least $8.7 billion over three years to develop large-scale AI models and integrate them across its device ecosystem.

What Next?

The central question for Xiaomi shares is whether the current profit trough represents a cyclical low or the beginning of a more prolonged period of margin compression. Bulls argue that memory chip inflation is inherently cyclical and that a normalization in DRAM and NAND pricing over the next 12 to 18 months could quickly restore a meaningful portion of smartphone profitability, especially as Xiaomi shifts its product mix toward higher-average-selling-price devices with better margin structures. Proponents also point to the company’s diversification into EVs, IoT, and AI as credible multi-year growth engines that should command a higher valuation multiple than a pure commodity handset maker once near-term earnings pressure subsides.

Bears counter that Xiaomi’s own margin and revenue targets for the smartphone business may be too optimistic, particularly if memory prices remain elevated or continue climbing. The risk of further downward estimate revisions looms large, and Jefferies’ move to Underperform with a price target below current levels signals that some sell-side analysts see limited upside and meaningful downside risk. Additionally, while the EV and AI initiatives offer long-term promise, they are capital-intensive and margin-volatile in the near term, potentially creating a “double squeeze” scenario in which smartphones remain underwater while new businesses are still ramping profitability.

The coming quarters will test whether Xiaomi’s bold diversification strategy can offset the structural challenges facing its legacy smartphone business, or whether the company is caught in a prolonged transition that weighs on profitability and investor returns until the memory cycle turns and new growth engines reach scale. For now, with Xiaomi shares having made new multi-year lows, and clearly under pressure, markets could well look to retest previous levels for signs of support.