Xiaomi Crushes Q2 Estimates On Shocking 26% EV Margin, But Smartphones Are In Reverse

• Record Financials: Xiaomi Corporation reports record Q2 2025 revenue of 116.0 billion yuan (US$16.1 billion), up 30.5% YoY, beating estimates. Adjusted net profit soars 75.4% YoY to a record 10.8 billion yuan, also surpassing expectations.
• EV Business Explodes: The new EV segment is the primary growth driver, contributing 21.3 billion yuan in revenue. It delivered 81,302 vehicles and achieved a stunning gross margin of 26.4%, far exceeding market forecasts and narrowing its operating loss to just 300 million yuan.
• Smartphone Division Stumbles: In stark contrast, smartphone revenue fell 2.1% YoY to 45.5 billion yuan, missing estimates. The decline was driven by a lower Average Selling Price (ASP), and the segment's gross margin compressed to 11.5% from 12.1% a year ago due to intense competition.
• AIoT Growth With A Caveat: The AIoT & Lifestyle Products segment posted robust revenue growth of 44.7% to 38.7 billion yuan, a new high. However, growth momentum is reportedly slowing, and the segment's gross margin has also seen a decline.
• Strategic Divergence: The results highlight a company in transition. Massive R&D spending (+41.2% YoY) is fueling the EV business, whose future success appears gated by production capacity, not demand, following the overwhelming reception of its new YU7 SUV. Meanwhile, the legacy hardware business faces significant headwinds.

Xiaomi Corporation's second-quarter 2025 results present a dramatic tale of two businesses. While the headline numbers boast record-breaking revenue and profit that comfortably beat analyst consensus, a deeper look reveals a stark divergence: a nascent, high-margin electric vehicle business is firing on all cylinders, while the company's foundational smartphone division is losing ground.

For investors, the report confirms that Xiaomi is rapidly morphing into an automotive player, but it also raises pressing questions about the health of its core operations.

The EV Juggernaut: A New Profit Engine Emerges

The undeniable highlight of the quarter was the performance of Xiaomi's Smart EV business. The division, which includes automotive and other new initiatives, generated 21.3 billion yuan in revenue on the back of 81,302 vehicle deliveries in Q2. This represents a staggering 197.7% increase in deliveries compared to the 27,300 units in the same period last year.

What truly shocked the market, however, was the division's profitability profile. The EV business posted a gross margin of 26.4%, a massive leap from 15.4% a year ago and well above the market consensus of around 23.5%. This remarkable margin was attributed to lower costs on key components, manufacturing efficiencies from increased scale, and a favorable product mix tilted towards the higher-priced SU7 Ultra model.

Consequently, the division’s operating loss narrowed to a mere 300 million yuan, putting it on a clear path to profitability far sooner than many had anticipated. The overwhelming market response to the new YU7 SUV—with a reported 240,000 locked-in orders within 18 hours of launch—underscores that Xiaomi's current challenge is not demand, but a significant production bottleneck. With a combined order book for its SU7 and YU7 models estimated to be over 500,000 units, delivery times now stretch well into next year, making production capacity the single most critical factor for growth.

The Smartphone Malaise: A Core Business Under Pressure

While the EV business basked in the spotlight, Xiaomi's smartphone segment painted a far more troubling picture. Revenue fell 2.1% year-over-year to 45.5 billion yuan, missing market expectations of 48.3 billion yuan. This marks the segment's first decline in seven quarters.

The weakness was not in volume—shipments were up a negligible 0.6% to 42.4 million units—but in pricing. The overall ASP dropped from 1,103.5 yuan to 1,073.2 yuan, dragged down by a higher mix of lower-priced Redmi models in overseas markets.

This pricing pressure, combined with intensified competition abroad and promotional activities during the domestic "618" shopping festival, squeezed profitability. The smartphone gross margin contracted to 11.5% from 12.1% in the prior year. While the company is seeing some success in its high-end strategy within mainland China—market share in the 4,000-5,000 yuan price band reached 24.7%—it wasn't enough to offset the broader weakness. The lackluster performance of the traditional hardware market, even with government subsidies, suggests a deeply sluggish consumer demand environment.

AIoT: Strong Growth, But Cracks Appear

The IoT & Lifestyle Products segment remained a source of strong growth, with revenue climbing 44.7% to a record 38.7 billion yuan, driven by smart home appliances like air conditioners and refrigerators.

However, beneath the surface, there are signs of concern. Analysts noted that the segment's growth rate has begun to slow, and its gross margin also experienced a "clear decline" in the quarter. While Xiaomi’s ecosystem continues to expand, with connected IoT devices reaching 989 million (+20.3% YoY), the segment's ability to maintain its growth trajectory and profitability is now in question.

An Investor's Dilemma: A Car Company With A Phone Business?

Xiaomi's Q2 report crystallizes the dilemma for investors. The company is now a sum-of-the-parts story. The traditional business—smartphones and IoT—faces a challenging market and margin pressure, warranting a conservative valuation. The EV business, however, is a high-growth, high-margin enterprise that is rapidly approaching profitability and deserves to be valued on a completely different metric, transitioning from a price-to-sales to a price-to-earnings model.

While the market had likely priced in the weakness in the legacy hardware business, the EV division's explosive margin expansion is the key surprise and provides a powerful new narrative. The question is no longer whether Xiaomi can build a car, but how quickly it can scale production to meet incredible demand and how sustainable its impressive margins are. For now, Xiaomi's stock will be driven by the tension between its struggling past and its incredibly promising automotive future.