Xiaomi's Smartphone Profit Engine Sputters as Memory Costs Skyrocket

Surging memory chip prices devastate Xiaomi's phone profits, overshadowing EV and AI progress. Stock languishes near 52-week low despite strategic pivot.

A dramatic surge in the cost of essential components is eroding the profitability of Xiaomi's core smartphone business, casting a shadow over the company's ambitious and costly transformation into an electric vehicle and AI powerhouse. Despite record handset sales and a promising EV launch, investor sentiment remains deeply negative, with the stock languishing near yearly lows.

The primary culprit is the semiconductor market. Prices for memory chips, a critical smartphone component, have exploded. Xiaomi President Lu Weibing highlighted the severe cost pressure, noting the company is being forced to raise prices for several Redmi models. The cost for a configuration package with 12GB RAM and 512GB storage is now approximately 1,500 yuan higher than in the first quarter of last year. Data from TrendForce underscores the scale of the problem, forecasting contract prices for DRAM to rise by up to 63% and for NAND Flash by up to 75% in the second quarter of 2026.

This cost shock is devastating for smartphone margins. The share of the smartphone division in the company's total gross profit has plummeted from nearly 41% to just 15.1% over two years. Management expects this pressure, fueled by supply bottlenecks, to persist throughout the first half of 2026.

The market's reaction has been unequivocal. On Thursday, the stock extended its losses, closing at 3.42 euros, a drop of 4.72% for the session. The share price is now a mere 0.22% above its 52-week low, underscoring a persistent downtrend that has seen the stock lose almost 23% since the start of the year.

This margin collapse in its foundational business threatens to complicate Xiaomi's expensive strategic pivot. To offset the profit decline in phones, the company is accelerating its transformation. The segment encompassing electric vehicles, artificial intelligence, and new initiatives now contributes nearly 35% to gross profit. For the current year, Xiaomi plans research and development expenditures exceeding 40 billion RMB, with 16 billion earmarked directly for AI and new projects.

Operational successes in these new areas are present but mixed. The company secured the third position globally by selling 165.2 million smartphones. Its electric vehicle division has garnered over 40,000 binding orders for the updated SU7 model. However, demand for the older YU7 model has cooled noticeably, with waiting times collapsing from a peak of 56 weeks to a maximum of 14 weeks.

To bolster its European EV ambitions, Xiaomi is aggressively recruiting talent. The company recently brought on Dieter Lorenz, a former Tesla manager who spent six years building the automaker's logistics networks in Central Europe. He now oversees the operational infrastructure for Xiaomi's vehicle market entry in Europe.

In a bid to support the sliding share price, management has initiated stock buybacks worth approximately 395 million Hong Kong dollars. Institutional investors have also been significant buyers via Southbound Trading recently. These efforts, however, have failed to stem the tide of selling driven by fundamental profit concerns.

All eyes are now on the quarterly report due at the end of May 2026. The figures will provide a critical data point, revealing the exact extent of gross margin erosion in the smartphone segment and indicating whether recent price increases for models like the Redmi Note 17 series are sufficient to compensate for soaring procurement costs. If they are not, the costly build-out of the auto and AI divisions will continue to strain overall profitability.