Xiaomi's Margin Gamble: Holding the Line on Smartphones While Betting Big on Cars

Xiaomi defends smartphone gross margin at 8.5% amid memory cost surge, while EV revenue climbs 17.1% and premium mix hits record.

There is a number buried in Xiaomi's latest quarterly report that tells the real story: 8.5 percent. That is the gross margin the company managed to defend in its smartphone business during the second quarter of 2026, a figure that looks almost defiant given the headwinds battering the industry. Memory component costs are running at historic highs, squeezing every handset maker that has to buy chips and storage modules at prices that bear no resemblance to previous cycle norms. Xiaomi chose to absorb that pain rather than pass it on and risk losing ground to rivals — a decision that cost it dearly on the bottom line but may have preserved something more valuable: market position.

The trade-off was stark. Revenue slipped 6.1 percent year on year to 108.922 billion yuan, while adjusted net profit tumbled 42.6 percent to 6.22 billion yuan, missing the 6.6 billion yuan consensus estimate. And yet the stock has been climbing — up 8.2 percent on Wednesday after Goldman Sachs reaffirmed its "Buy" rating on the shares, lifting its smartphone gross margin forecasts for 2026 through 2028 to 8.9 percent and 9.5 percent respectively. The bank sees the margin trough arriving in the third quarter of 2026, with a recovery taking hold from the fourth quarter. Investors, it seems, are willing to look through the current pain.

A Premium Pivot Takes Shape

The headline shipment numbers look grim at first glance. Xiaomi delivered 31.2 million handsets during the quarter, a 26 percent drop from a year earlier, with pure smartphone revenue down 7.5 percent to 42.1 billion yuan. The broader Smartphone × AIoT segment saw revenue fall 11.3 percent to 84 billion yuan. But dig deeper and a different picture emerges: the average selling price of Xiaomi's phones jumped 25.9 percent year on year to 1,351 yuan. In China, devices priced at 3,000 yuan or above accounted for 32.1 percent of sales — a record, and up 4.5 percentage points from the prior year. In the 3,000 to 4,000 yuan band, Xiaomi's market share reached 16.2 percent, another notable gain.

The company is clearly executing an upmarket shift even as volumes contract. On the earnings call, Lu Weibing acknowledged that memory price increases had exceeded Xiaomi's own expectations — a problem that has hit the entire global smartphone market, with industry-wide shipments falling 6 percent as a result of component costs. Xiaomi's response has been to hold its margin line and push premium devices, a strategy that has kept it at number three globally in shipments for 24 consecutive quarters.

The EV Engine Accelerates

While the core handset business grinds through a margin cycle, the electric vehicle division is becoming the growth story investors are betting on. EV and new initiatives revenue climbed 17.1 percent to 24.9 billion yuan, with 104,199 vehicles delivered in the quarter — up 28.2 percent year on year. The segment still posted an operating loss of 2.6 billion yuan, but Xiaomi has raised its full-year 2026 delivery target to 550,000 vehicles, a clear signal that management sees the current losses as an investment in a future where the company is as much a mobility player as a phone maker.

The dual-track strategy — defending share in a shrinking core business while pouring resources into EVs and AI — is the kind of balancing act that defines tech giants in transition. Huawei, Samsung and Apple all face similar questions about how to protect hardware margins while building new growth engines. Xiaomi is demonstrating just how uncomfortable that straddle can be. Research and development spending rose 19 percent to 9.2 billion yuan in the quarter, with capital expenditures hitting 3.6 billion yuan — further evidence that the company is not retreating from its long-term bets despite the near-term margin pressure.

Timing the Turnaround

The market's reaction suggests investors are buying the narrative that the worst is behind. But the technical picture offers a more cautious read. The stock, trading around 3.03 euros, sits 5.0 percent above its 50-day moving average yet remains 16 percent below its 200-day average — a sign that the recent rally is a rebound, not a structural breakout. Year to date, the shares are down 30 percent, and over the past twelve months they have lost 47 percent. Annualized volatility of 61 percent underscores just how uncertain investors remain about which story to believe.

Goldman's timing call is precise: margin bottom in Q3 2026, improvement from Q4. That gives Xiaomi roughly one more quarter of pain before the memory cost cycle is expected to ease. The question is whether the EV and AI segments can grow quickly enough to offset the smartphone margin squeeze in the interim — and whether the market has the patience to wait. There is also speculation, reported by Handelsblatt, that Stellantis has held talks with Xiaomi and Xpeng about potential partnerships, including equity stakes. Nothing has been confirmed, but the prospect of an alliance with a major Western automaker would add another layer to the Xiaomi story.

For now, the company is making a calculated wager: sacrifice near-term profitability to hold smartphone market share, while racing to scale its EV business before the memory cost cycle turns. The 8.5 percent gross margin is the evidence that the strategy is being executed. Whether it is the right one will only become clear once the fourth quarter arrives and the promised recovery either materializes or fails to show.