Daily Gains Letter

Emerging Smartphone Maker Xiaomi Threatening Apple’s Chinese Expansion?

By for Daily Gains Letter |

Smartphone Maker Xiaomi Threatening AppleApple Inc. (NASDAQ/AAPL) has become the Wal-Mart Stores Inc. (NYSE/WMT) of the technology sector stocks. Under the aggressive strategy of CEO Tim Cook, the company continues what its legendary founder Steve Jobs started—to rule the smartphone and mobile space.

The company has developed a cult-like following in the United States and is rapidly trying to take over the worldwide technology space. Apple is currently number two among tech stocks globally, with ample space to grow, especially in the smartphone-hungry Chinese market, where there are more than 800 million subscribers.

As far as technology stocks go, I have talked about Apple in the past and have long been a bull on the stock, believing the company could be the first to surpass the one-trillion-dollar valuation mark.

Apple a Heavyweight in the U.S. Tech Sector

What impresses me about Apple is its vision and strategy to move into other mobile applications, rather than simply relying on sales of its “iPhones.” The company is aggressive and works hard to defend its patents against all its rivals, including Samsung Electronics Co. Ltd., the world’s top maker of smartphones.

Apple is closely followed by its rivals. Even a patent for a camera system that Apple applied for a few years ago and was only approved last week wreaked havoc at GoPro, Inc. (NASDAQ/GPRO), the maker of head-mounted and underwater camera systems. While there was no evidence Apple was looking at a competitive product, the fear it generated among GoPro investors was massive and shows the threat Apple holds over its competitors in the tech sector.

With a market cap of about $634 billion and truckloads of cash, Apple has rewarded investors, moving up from a 52-week low of $70.51 to its current $108.00 share price. Its valuation at 12.5X its FY16 earnings is still reasonable for this technology stock and points to additional upside potential.

APPLE Inc NASDAQ GS

Chart courtesy of www.StockCharts.com

Now we are hearing reports of a rising star, China-based Xiaomi, in the global smartphone market.

Emerging Smartphone Maker a Threat to Apple?

In three short years, the company has become the third-largest seller of smartphones in the world and is now directly taking aim at Apple. With its product even bearing a resemblance to the “iPhone” (perhaps another lawsuit in the works?), Xiaomi is known as the “Apple of China” among Chinese technology stocks.

Of course, Apple wants to make sure it expands into the Chinese smartphone market via its venture with China Mobile Limited (NYSE/CHL). Xiaomi likely wants to impede this expansion, since it’s occurring right in its own backyard.

Longer-term, Xiaomi wants to invade Apple’s territory and take the U.S. market. Xiaomi phones are priced cheaper, which could help in China and the emerging markets, but the company doesn’t have the top-brand image that Apple does. Moreover, there are all the bells and whistles Apple users have access to, namely the millions of apps, that make the company one of the top technology stocks. This is something Xiaomi currently lacks.

While Apple should not overlook Xiaomi, I doubt the company will be able to beat the tech giant in the U.S. But in China…it may be a different story; Xiaomi may have the advantage with its lower prices. As I have said many times before, Apple needs to offer much cheaper phones in China and the emerging markets in order to outsell Samsung. Competition from Xiaomi may just amplify the problem.

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