Inflatable unicorns stand on display at the Noah technology conference in Berlin, Germany (Photographer: Krisztian Bocsi/Bloomberg)  

Questions for Xiaomi the Aging Unicorn

(Bloomberg Gadfly) -- Questions, questions, questions.

If there's one thing that's tailed China's Xiaomi Corp. for the past six years, it's questions.

The most recent come as a pair: Will the company IPO next year, and will it fetch the $50 billion it's supposedly seeking?

Last weekend, tech industry newsletter The Information reported that the maker of smartphones and other devices is eyeing a 2018 share debut. Xiaomi denied it, according to Sina.com. And now sources are telling Lulu Chen and Peter Elstrom of Bloomberg News that a listing is indeed in the cards, with hopes of valuing Xiaomi at $50 billion.

Questions for Xiaomi the Aging Unicorn

That figure and an IPO are intertwined. Recall that Xiaomi was valued at around $46 billion after its latest funding round three years ago. Two years ago I called the firm's bluff, citing missed smartphone targets and a lack of faith from even the company's own suppliers.

I copped a fair bit of flack for that piece, written as a reporter for Bloomberg News, with Xiaomi cheerleaders labeling me a skeptic and naysayer. As a Gadfly columnist, my doubts remain.

Xiaomi does deserve credit for its incredible turnaround, which includes a standout 2016 and renewed traction in India. But its 100-million-unit-shipment target for 2018, which seems within reach, is merely a rehash of the same goal founder Lei Jun had for 2015. Three years is forever in startup land, especially for VC investors who bet on rapid growth to drive valuations higher.

Questions for Xiaomi the Aging Unicorn

And that's the problem for Xiaomi. Its sky-high $46 billion price tag was well beyond the revenue it was churning out at the time. But like all startups, Xiaomi was expected to grow into its lofty valuation, something that still hasn't happened.

Assuming Xiaomi does hit the $15 billion revenue figure it's targeted for this year, it would be valued at three times annual sales. Apple Inc., which generates operating margins of 27 percent, is trading at 3.9 times revenue, while Samsung Electronics Co. is running at 1.4 times and pulls in operating margins of about 10 percent at its phones business. And let's remember that between them, Apple and Samsung grab more than half of the world's smartphone industry revenue and almost all its profit.

Xiaomi doesn't disclose operating metrics, but I don't believe it's bringing in margins of 10 percent, let alone 27 percent. Of course, if CFO and Goldman Sachs Group Inc. alumnus Chew Shou Zi wants to tell me otherwise, he's got my number.

Xiaomi PR execs like to spin a tale about the firm's large catalog of products, which includes fitness bands and air filters, and they talk about some ecosystem effect that justifies Xiaomi not being viewed as yet another devices maker. I don't buy it. Adding the word "connected" to a range of appliances doesn't a smart home make -- even Apple hasn't pulled off that trick yet.

Questions for Xiaomi the Aging Unicorn

All this is to say that a $50 billion valuation seems like a stretch. I suspect Xiaomi knows this, and it may help explain why the company has tapped debt markets to raise cash in the past few years instead of risking a down round by returning to equity investors.

If Xiaomi would struggle to get a $50 billion valuation through VC funding, then its bankers are going to have to run a marvelous roadshow to get such an IPO price. Facebook Inc. managed to list five years ago at around 60 percent higher than its prior funding round. Snap Inc., on the other hand, barely managed to surpass its most recent valuation, and is now trading 20 percent below its listing price.

Questions for Xiaomi the Aging Unicorn

Time may be running out. Xiaomi is already one of the world's oldest unicorns at 2,144 days, according to CB Insights, and investors may be justified in getting a little impatient. If they push for an IPO now they could lock in some of their gains and limit any downside, but they may miss out on the future growth that Lei Jun and his team keep promising.

For Xiaomi, its investors, and its bankers, that's yet another question to be answered.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

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