Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Finding the next Apple
When you think smartphones, almost everyone associates the sector with Apple’s ubiquitous iPhone. That is apart from those rare people who prefer the Android platform or are converts to the more flexible range of Samsung handsets.
Based on the US$1 trillion ($1.37 trillion) market capitalisation of Apple (NASDAQ: AAPL), one simply assumes that it dominates every market in which it operates. But interestingly, in its core market of smartphones, it has been usurped by not one, but now two Asian leaders in handset production.
While the size and scale of Samsung (KRX: 005930) is widely accepted, a little-known Chinese tech company recently overtook Apple to take second spot; and this isn’t a case of “if you’re not first, you’re last.” Xiaomi (HKG: 1810), pronounced shau-mee, has had an incredible 2021 following a few years of stagnation, with Canalys Market Report confirming that it now has 17% of the smartphone market, just behind Samsung at 19%.
Naturally, shares have rallied strongly, up over 80% over the last 12 months. But who is it and what does it do?
Xiaomi is a technology and services company founded just ten years ago and could best be described as the disruptor that is now challenging the original disruptors. Rather than seek to dominate every market, the group has focused on smartphones and ‘Internet of Things’-enabled products, ranging from robot vacuums to speakers and other parts of the ‘connected homes’ we now live in.
Similarly to Apple, the company derives close to 90% of its US$11 billion ($15 billion) in quarterly revenue from its smartphones, which have a key differentiating point. The focus is solely on ‘value for money’, similar to the lower model Nokias in the early days of the smartphone boom. Essentially, Xiaomi is seeking to dominate that part of the market that can’t afford or simply prefers not to pay over $1,000 for a new phone every two years.
And it is clearly working, particularly in the fastest-growing and least-competitive emerging market countries of India and China. The group has just 6% market share in China, albeit the biggest potential market in the world, but an impressive 27% in India, driven by a younger demographic. It is this wider adoption that has driven record sales growth of 54% in the second quarter and likely another strong quarter ahead.
While the company has clearly benefitted from the US’ banning of Huawei on security concerns, Xiaomi is seeking to build something bigger; think Apple’s iOS. The group has its own operating system and interface called MIUI, which now has over 400 million users around the world. While this ecosystem is nowhere near as powerful as Apple, it is clearly growing and supported by a much lower cost entry price for their hardware.
Recent growth rates have been incredible, with smartphone revenue jumping 69% along with global shipments of Xiaomi’s handsets, with Chinese sales jumping 75% on their own. The company’s TV shipments on the continent doubled in just 12 months and are ranked number one by retail sales in the ultra-large screen sector by industry monitor AVC. Similarly, some 351 million devices are now connected to its Internet of Things platform. As you can imagine, that offers the company a lot of data and opportunity. Despite the strength, the company trades on a P/E ratio of between 20 and 30-times forward earnings.
It has become clear from the experiences of the last two decades that if you are not exposed to the most powerful and prevalent themes, you cannot expect to generate strong and compounding returns.
By no means am I suggesting that Xiaomi is a better-quality company than Apple, but more so, I’m stressing the importance of viewing an investment into both companies as a way to protect your portfolio from what are becoming more powerful risks to the status quo. It is clear to me, both personally and as an investor, that every part of the economy we know, whether that is our Big Four Banks to our retailers, is being disrupted, which will clearly impact the incumbents’ profitability and eventually returns.
Therefore it is as important as ever to think outside the box and consider the risk that your portfolio is being disrupted by global companies, rather than focusing solely on what has always been.
