Is Huami, which says "no" to Xiaomi, a meme or a dark horse?

Entry-level wearable device manufacturer Huami Technology saw a 78.5% increase in revenue in the third quarter, but expects growth to slow to about 40% this quarter.

Key Points:

• Huami Technology recorded strong revenue growth for the second consecutive quarter in the three months ending in September and achieved operational breakeven on an adjusted basis.
• Since shifting to develop its own brand Amazfit and reducing reliance on Xiaomi, the company is gradually emerging from the shadow of losses.

Yang Ge

Is it a hyped "meme stock" or a truly capable dark horse in the wearable market?

This is the big question hanging over Huami Technology (ZEPP.US). Since July, as investors discovered this company in the "discount zone" of the global fitness wearable device market, its stock price has skyrocketed more than ninefold. The company announced its latest quarterly results this Tuesday, showing strong revenue growth, with its Amazfit brand finding a solid position in the entry-level market.

While some believe the stock's surge over the past four months is highly speculative, similar to the "meme stock" phenomenon of GameStop (GME.US) in 2021, from our perspective, this rally appears to be more sustainable. It is worth noting that after reaching a multi-year high in September, the stock has since fallen about 40%.

Even after such dramatic ups and downs, Huami's current price-to-sales ratio is still only 3.98 times, just over half of its only publicly listed competitor Garmin (GRMN.US) at 7.39 times. This suggests that the recent rise in Huami's stock price is more likely reflecting its past severe undervaluation, now gradually being rediscovered by the market.

Interestingly, the company has yet to receive widespread attention from Wall Street analysts. According to Yahoo Finance data, currently, only one analyst is tracking Huami, and participants in its latest earnings call mostly come from smaller research firms, such as Fundamental Research Corp. and Point72 HK. We expect this situation may change next year, as there are not many companies in this rapidly growing electronic device segment that can go public independently.

Huami is making rapid progress in the market, but its brand image still needs improvement. The company is known for its affordable fitness bands, which have similar functions to its peers but at more attractive prices. The latest watch model, Amazfit T-Rex 3 Pro, is a highlight product of the third quarter, priced at about $300, far below Garmin's similar products at $1,100, and has received quite good user reviews on Amazon.

However, as the saying goes, "you get what you pay for." In a review of the T-Rex 3 Pro by the authoritative tech media Wired, the journalist wrote: "Almost every operation screen, every attempt to change settings, and every time I wanted to do the most basic things drove me crazy. Its level of badness is almost impressive." Clearly, Huami still has much room for improvement in enhancing product user experience and competing with brands like Garmin and Fitbit. However, at least so far, its low-price strategy is strongly driving revenue growth—the company has resumed growth since the second quarter of this year and has achieved positive cash flow, getting closer to returning to profitability after years of losses.

Goodbye Xiaomi

Today's Huami resembles a "second life" for this Chinese company in many ways. It initially started mainly as an OEM, producing wearable devices for smartphone giant Xiaomi (1810.HK) under a licensing agreement. However, the company quickly realized that this type of OEM business has very low profit margins and is highly dependent on its partnership with Xiaomi—once Xiaomi terminates the license or seeks other partners, the business could face significant impacts.

In recent years, Huami has gradually reduced its reliance on Xiaomi products, with Xiaomi-related products now accounting for only about 5% of its total sales. However, this "weaning" process has been quite difficult, leading to a sharp decline in revenue and a period of losses.

In the quarter ending in June, Huami finally achieved significant revenue growth, benefiting from the launch of new products that received widespread acclaim, with revenue rising 46.2% year-on-year. By the third quarter, the growth momentum further accelerated, increasing by 78.5% year-on-year, from $42.5 million in the same period last year to $75.8 million.

However, the company expects this rapid growth to slow down in the fourth quarter—this quarter is typically a peak season for consumer electronics manufacturers, driven by the Christmas shopping season. Huami predicts revenue will grow approximately 40% year-on-year, ranging between $82 million and $86 million.

This more conservative outlook may become a major catalyst for the stock price decline—over the two trading days following the announcement, Huami's stock price fell by about 25%. But as mentioned earlier, even after the pullback, its stock price has still increased more than ninefold since July.

The company's gross margin is also continuously improving, directly benefiting from the development of its own brand. The gross margin for the third quarter reached 38.2%, up 2 percentage points from the second quarter, but still lower than the 40.6% in the same period last year, and there remains a significant gap compared to Garmin's latest quarterly gross margin of 60%. Additionally, due to the recent surge in memory chip prices, Huami's gross margin may face pressure in the coming quarters.

Huami has also performed well in controlling expenses, with operating expenses in the latest quarter remaining basically flat compared to the same period last year. The combination of strong revenue growth and a stable cost structure has allowed the company to reach the important milestone of breakeven at the adjusted operating level. The actual operating loss was also minimal, at only $900,000, and management stated during the earnings call that the company expects to achieve adjusted operating profit in the fourth quarter.

The next step will be to return the company to profitability. In the third quarter, this metric was still a loss, but it has significantly narrowed to $1.6 million, a notable improvement compared to the $13.3 million loss in the same period last year