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Xiaomi Flops on Debut: Will Tech Fall Victim to Trade War?

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Shares of Xiaomi Corp. declined 5.9% at the beginning of its first day of trading on Jul 9, at the Hong Kong Stock Exchange. The Chinese smartphone manufacturer managed to raise just $54 billion, far below its expectations. In what was touted be one of the biggest IPOs of the year, this definitely is a disappointing start for the world’s fourth-largest mobile phone maker.

Interestingly, Xiaomi’s debut on the Hong Kong Stock Exchange comes three days after the United States and China imposed tariffs of $34 billion on each other, thus waging a trade war against each other. Xiaomi’s IPO was being seen as an important tech listing among Internet giants from China like Tencent, which also plans to list its shares on a U.S. stock exchange. The disappointing start to Xiaomi’s stock saw the Shenzhen Component Index, which tracks technology and other new economy firms, falling to its lowest level in three and a half years on Jul 5. Top of Form

That said, Xiaomi was perhaps being overvalued and might just have given an indication that IPOs of tech companies may not enjoy lofty valuations in the tariff-trauma that mat grip the markets. However, tech stocks have been performing well and it’s still too early to say that trade war has started taking its toll on players in this corner.

Xiaomi’s IPO Disappoints

Xiaomi’s disappointing debut comes as a time when the U.S.-China trade war has just begun. At the same time, Chinese stocks have been taking a hit with the Shanghai Composite Exchange officially entering bear market in the last week of June. The Hong Kong Stock Exchange has declined more than 10% since early June.

Given this scenario, doubts over Xiaomi’s lofty valuation started cropping up days after the company filed for its IPO. People close to the deal had initially expected that Xiaomi could raise at least $10 billion at a valuation of $100 billion that would have made it the biggest global offering since Alibaba Group Holding Limited (BABA - Free Report) made its debut at the NYSE four years ago.

Xiaomi had priced its IPO at a price higher than tech giants such as Apple, Inc. (AAPL - Free Report) , Tencent Holdings Ltd. and Facebook, Inc. (FB - Free Report) . However, it managed to open trade with a valuation of only $54 billion. Understandably, Xiaomi’s debut proves that investors have realized that at $100 billion, the company was being overvalued.

Moreover, apart from trade war fears, what may have gone against Xiaomi is investors’ skepticism toward the company’s usual business model. Questions have also been raised over Xiaomi’s ability to increase profit margins in the future given that most of its smartphone are targeted at the low end of the market.

Trade War May Not Really Affect Tech Companies

The United States imposed tariffs on $34 billion worth of Chinese goods on Jul 6. China retaliated with tariffs on an equal amount of goods. This definitely has made investors jittery. However, the list doesn’t contain products commonly purchased by Americans such as televisions and mobile phones.

Interestingly, Micron Technology, Inc. (MU) despite losing a patent infringement case in a Chinese court last week, which could be a result of the trade dispute, said that it won’t impact the company much. This saw the company’s shares rise 0.7% on Jul 6. Micron has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

One of the biggest reasons behind this is that perhaps China knows that it cannot make microchips on their own and will have to rely on U.S. companies. The United States is the largest semiconductor manufacturing country, with China being its biggest market.

Semiconductor giants like Skyworks Solutions, Inc. (SWKS - Free Report) and Qualcomm depend heavily on the Chinese market. In fact, Apple and Intel (INTC - Free Report) are among the top 16 U.S. companies that generated a total of $105.5 billion from China in 2017. Qualcomm, Broadcom Inc. (AVGO - Free Report) and NVIDIA Corporation (NVDA - Free Report) generated respectively 16.6%, 9.5% and 1.9% of their revenues from China.

Summing Up

Xiaomi’s disappointing debut might just be an indication that IPOs of tech companies may not live up to lofty valuations in the near term. Tech stocks are already reeling under trade war fears, which could possibly be another reason that went against Xiaomi.

That said, it may be too early to assess if trade war will really take its toll on tech companies, as China depends heavily on U.S.-manufactured microchips. Naturally, imposing higher tariffs will adversely affect China itself.

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