Jefferies has downgraded Xiaomi to an "Underperform" rating following the company's underwhelming results for the first quarter of 2026. The brokerage pointed to a steep decline in operating profit and intensifying margin pressure driven by weaker demand across several of Xiaomi's core businesses, rising component costs and higher research and development expenses.
Earnings and revenue performance
Xiaomi posted first-quarter revenue of RMB99.1 billion, an 11% decline compared with the same quarter a year earlier. Adjusted net profit fell 43% to RMB6.1 billion. Jefferies highlighted an especially sharp drop in earnings before interest and tax - a 70% year-on-year plunge - which the brokerage said was well below both its own projections and the broader market consensus. The company reported an EBIT margin of 3.0% in the quarter, down from 9.0% a year earlier.
Analysts at the firm attributed the earnings deterioration to a combination of weaker smartphone and AIoT sales, bigger-than-usual research and development outlays and softer momentum in Xiaomi's electric vehicle business. R&D expenses rose 33% during the quarter, a point Jefferies noted as contributing to the compressed margins.
Smartphone division pressure
Jefferies warned that Xiaomi's smartphone business is particularly exposed to climbing memory chip prices. The bank emphasized that about 60% of Xiaomi devices are sold at price points below US$200, leaving the company vulnerable when component costs rise. Jefferies said that raising prices on higher-end models may not be enough to offset those increasing component expenses.
Electric vehicle sales and forecasts
The brokerage's note also flagged signs of softening demand in Xiaomi's EV segment. Vehicle shipments fell to 81,000 units in the first quarter from 145,000 in the previous quarter, a reduction Jefferies said was partly due to model transitions and cooling sales of the YU7 series. Xiaomi's management reaffirmed a 2026 shipment target of 550,000 vehicles, but Jefferies lowered its own shipment forecast to 495,000 units.
In valuing the EV business, Jefferies reduced its multiple to 1.5 times projected 2026 sales, down from 2.2 times previously, reflecting the brokerage's concerns about weakening EV demand and heightened competition in the market.
AIoT and international sales
Xiaomi's AIoT division recorded a 24% decline in revenue, which Jefferies linked to weak consumer demand in China and stronger competitive pressures. The note also acknowledged that international expansion offered partial offset, with overseas sales accounting for about 40% of AIoT revenue during the quarter.
Cost trajectory and investment plans
Looking ahead, Jefferies expects ongoing earnings pressure as Xiaomi steps up investments in artificial intelligence and electric vehicle development. The company plans to spend roughly RMB40 billion on research and development in 2026, a level of investment the brokerage views as a near-term drag on profitability even as it supports long-term product development.
Price target and market reaction
Jefferies trimmed its target price on Xiaomi shares to HK$25.49 from HK$26.98. That new target implies a 14% downside from the stock's prior close of HK$29.76, according to the brokerage's note.
Bottom line
Jefferies' downgrade centers on the confluence of weaker end-demand, rising component costs and elevated R&D spending that together have compressed margins and reduced near-term profit visibility for Xiaomi. The firm reduced both its EV shipment forecast and the valuation multiple it applies to the EV business, while flagging continued downside risk if component prices remain elevated or if EV demand softens further.