Net profit slashed by 43%, Xiaomi’s quarterly report reveals a signal more important than the numbers.

After the market closed on May 26, Xiaomi Group released a results sheet that at first glance causes one to frown, but upon closer examination is thought-provoking.

Adjusted net profit was 6.07 billion yuan, down a staggering 43.1% year-on-year; operating profit was 5.31 billion yuan, falling nearly 60%; total revenue was 99.1 billion yuan, a decrease of 10.9% year-on-year—this is Xiaomi’s biggest quarterly profit drop in three years, which would be enough to trigger a wave of panic selling for any consumer electronics company.

But on the same day as the financial report, Xiaomi announced another news: a 20 billion Hong Kong dollar share repurchase plan, effective from June 2 for one year. The scale is unprecedented in Xiaomi’s history.

These two events together constitute the most significant tension worthy of interpretation in the financial report: management uses the historically worst single-quarter profit figures to tell the market “we are under pressure,” yet uses the largest ever repurchase plan to tell the market “we are confident.” Which signal is more authentic?

I. How deep is this cut from storage costs?

To understand this financial report, it is necessary to first understand the logic of this round of storage supercycle.

Starting from mid-2025, global DRAM and NAND Flash prices entered a rapid rising channel. The fundamental reason is not a surge in consumer electronics demand, but rather the demand from AI data centers for HBM (high-bandwidth memory) and DDR5, which significantly drew away high-quality capacity from major suppliers like Samsung and SK Hynix, leaving less share for mobile phone manufacturers, thus naturally pushing the prices up.

This is a special cycle of "AI draining the blood of consumer electronics."

The impact on Xiaomi is direct. The phone business is Xiaomi’s largest revenue source (about 45% in Q1 2026), and storage costs usually account for 15%-25% of mobile phone BOM (Bill of Materials), even higher for premium models. When storage prices rise 30-40%, the cost per phone can increase by tens to over a hundred yuan.

In Q1 2026, Xiaomi faced a choice: pass the cost to consumers (raise prices), or bear it themselves (compress gross margin)?

The answer was a compromise, but leaning towards the latter. Management revealed in a conference call that only in mid-April did the company raise certain phone prices by 200-300 yuan, stating they "strive to be the last and with the smallest price increase." This express both a consumer posture and objectively means an active concession of gross margin.

The result is clear: phone business gross margin slipped from about 12.4% in Q1 2025 to 10.1%, a decrease of about 2.3 percentage points.

10.1%. In the past month, this figure has almost become the central focus in market discussions on Xiaomi. The reason is, prior to the report, many analysts worried that phone gross margin would drop below 10%—considered a psychological red line, as less than 10% means the phone business loses basic profit buffering during the storage cycle.

Xiaomi held the line—barely, but they did.

Goldman Sachs noted in their report that the phone gross margin at 10.1% was "better than their previous lower limit forecast of about 10%," and subsequently raised the target price from HK$62 to HK$65, reaffirming a buy rating. This move itself reveals the logic of market pricing: in this sharply deteriorating profit report, 10.1% is the core information—not because it’s high, but because it didn’t breach the threshold.

From a longer historical view, during the storage downturn from 2021 to 2022, industrywide phone gross margin declined 3-5 percentage points; Xiaomi’s gross margin fell to around 8.7%. Management predicts this supercycle’s impact will last until 2027 or even 2028, but the drop is milder than before—thanks in part to the premiumization strategy as average selling price (ASP) rose 8.2% year-on-year to a new high, helping offset rising costs.

Of course, the full-year phone gross margin will still fluctuate around 10%, which is the basic scenario given by management. In other words, this isn’t a short pain but a low-point journey for the entire year.

II. IoT’s 25.2% and 20 billion repurchase, obscured by profit numbers

There are two signals almost completely drowned out in the Q1 financial noise, yet they matter more for understanding Xiaomi’s long-term value.

The first is IoT gross margin.

Xiaomi’s IoT and consumer products business (including smart home, wearables, robot vacuum cleaners, air conditioners, TVs, etc.) achieved a gross margin of 25.2% in Q1 2026, up by 5.1 percentage points from last quarter’s about 20.1%.

This is a number worth discussing separately. IoT business has long been considered Xiaomi’s "accessory business," with low gross margin, fragmented SKUs, and fierce competition. But in the past two years, as major premium appliances (high-end air conditioners, dishwashers, premium robots, etc.) increased in proportion and overseas markets (especially Europe and Southeast Asia) became more accepting of brand premium products, the IoT structure has quietly changed.

Q1 2026 overseas IoT revenue saw double-digit growth and hit a record high—this reflects Xiaomi’s accumulated global brand momentum starting to materialize. A Xiaomi air purifier sold in Europe for 300 euros has a much higher gross margin than its price-fighting counterpart in China.

IoT gross margin at 25.2% isn’t dazzling in the internet consumer goods industry, but for a hardware-based scale brand, it is a structural upward signal. Whether it can remain above 23% all year will be an important metric for future quarters.

The second is the 20 billion HKD repurchase.

To appreciate its weight, context is needed. 20 billion HKD is about 17.6 billion yuan, while Q1 2026 Xiaomi’s adjusted net profit was just 6.07 billion yuan—so the repurchase scale is nearly equivalent to three quarters of profits.

Management announced the largest-ever repurchase in the worst profit quarter, which usually means two things: purely for market value management (using repurchase to replace unconvincing verbal guidance); or management truly believes the current stock price is vastly undervalued versus intrinsic value, and that cash flow is sufficient to support this.

From the balance sheet, Xiaomi had ample cash and equivalents at the end of Q1 2026 (ongoing EV investment has not affected liquidity), so the latter interpretation is reasonable. Whether the repurchase plan is executed on schedule and at full scale, however, will depend on subsequent quarters’ cash flow data—a cautious attitude that any rational investor should retain.

III. EV and AI: two cards, one played, one not revealed

Q1 2026, Xiaomi delivered 80,856 EVs. Compared to the annual target of 550,000 vehicles, this is only about 14.7% of the annual goal, far below the quarterly average (about 137,500).

Management explained this as a product switching node. Q1 is usually the window where backlog orders from the previous product cycle are cleared and new product orders are accumulated—a structural low point, not a trend decline.

The logic makes sense, but to achieve the 550,000 annual goal means Q2-Q4 must deliver about 469,000 vehicles, or an average of 156,000 per quarter—1.9 times Q1’s deliveries. Whether this production ramp is realistic will be the main verification for upcoming monthly delivery data. Management said “monthly production is steadily ramping up” on the conference call, but the specifics will come out in the May month-end report.

EV gross margin of 20.1% is also worth looking into. This number dropped 3.1 percentage points from Q4 2025’s 23.2%, due to three factors: first, vehicle purchase tax subsidies were treated as added costs in accounting; second, rising storage and parts prices also affected car supply chain; third, high-margin models like SU7 Ultra had lower delivery proportions in Q1, dragging down the average.

20.1% is still top-tier in China’s new energy vehicle sector, but Xiaomi’s goals go further. As scale grows and new lines launch, management aims to keep EV gross margin above 20% and raise it further after scaling.

For the EV business overall, Q1 saw an operating loss of 3.1 billion yuan. Combined with R&D and marketing expenses for EV and AI innovation (totaling 7.1 billion yuan, up about 46% year-on-year), the business is still in a typical “high investment, dilution phase” in 2026. Referencing Tesla and BYD’s early expansion, such losses are strategically tolerable—but do suppress overall profitability for some time.

AI follows another path, but unlike EV, AI was mainly reflected on the cost side in the Q1 report, not the revenue side.

Xiaomi announced at least 16 billion yuan in AI R&D investment in 2026, and over 60 billion in three years—an aggressive plan that ranks Xiaomi mid to high among global tech companies. As to progress, MiMo V2.5-Pro ranked first in several global open-source model benchmarks—a meaningful milestone for a consumer electronics company, proving Xiaomi’s genuine technical strength in edge AI, not just concepts.

Morgan Stanley named Xiaomi the “preferred stock,” with AI as the core logic: MiMo base models performed well, and Xiaomi’s strategy is to integrate phones, vehicles, and smart home into a single AI-driven ecosystem—a real closed loop under one AI brain. When will this loop be truly realized? That depends on the new operating system scheduled for July-August release.

The new OS is Xiaomi’s most important current time node. Management calls it a milestone for three-end deep system-level connection—achieving full contextual transfer and scene linkage at the OS level, not just protocol understanding. If the OS launches smoothly and market experience is close to expectations, it will be the main catalyst for Xiaomi’s AI narrative in the second half.

Goldman Sachs shares a similar view, believing Xiaomi’s accelerated AI model upgrade will help future LLM commercialization, making this a key reason to maintain buy rating and raise target price.

IV. What is the market really pricing in this financial report?

Returning to the opening question: management gave two opposing signals—which is more authentic?

Perhaps both are real, just at different time horizons.

Profit plunge is the current reality—the storage supercycle continues, EV burns cash, AI is in investment phase, and these costs won’t disappear in 2026.

20 billion repurchase is a bet on the future—management is telling the market in their toughest quarter, with the strongest act, that they see the other side of the cycle.

From analyst reactions before and after the report, market pricing logic has quietly shifted. Before, institutions asked “How badly will phone gross margin fall, how much profit will be lost?” After, Goldman Sachs increased the target from HK$62 to HK$65, Morgan Stanley maintained Xiaomi as preferred—meaning institutional focus shifted from “how bad is it” to “how long will it stay bad.”

This shift corresponds to three observable signals, all of which will appear in the coming months:

First, monthly EV delivery data. Can May and June deliveries rebound above 15,000 units per month? This will directly verify the annual target feasibility and influence EV profit timeline expectations.

Second, new OS launch and market reaction. July-August 2026 is the crucial landing point for Xiaomi’s AI strategy. The quality and user feedback of the OS will make or break the first step of moving the AI narrative from concept to commercial realization.

Third, Q2 gross margin trend. Can phone gross margin stay above 10% with persistent storage cost increases? Can IoT’s 25.2% stay above 23% after seasonal factors fade? These two numbers will be the core pricing anchors in the next financial report.

In a supercycle, the hardest part isn’t knowing where the end is, but not knowing how much further you have to go. In Q1, Xiaomi tells the market: we know the direction, we’re holding the main business, we’re betting on the future—but the path isn’t finished yet.

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