Earlier reports suggested that Xiaomi was targeting a $100 billion valuation. At the current price, investors are clearly valuing Xiaomi more like a hardware company than a high-margin provider of software and services.
The person who attended the roadshow said that most investors in the audience weren't aware that Xiaomi had a vast portfolio of apps or that it has a smartphone operating system called MIUI that sits on top of Google's Android and has 190 million monthly active users. And in comparing Xiaomi to Apple, the person said, investors were missing the fact that its software and services don't work exclusively with Xiaomi phones.
Xiaomi's gross margin, or the profit left after subtracting the costs of goods sold, has more than tripled in the past two years. But it's still only 13.2 percent, as of last year. That's far below Apple's margin of 38 percent or Alphabet at 57 percent.
There are other reasons for U.S. money managers to shy away from Xiaomi.
Kevin Landis, the chief investment officer of Firsthand Capital Management, a tech-focused firm in Silicon Valley, said that Chinese companies can make for challenging investments. Landis owns shares of Chinese internet giant Tencent, but he said that it's generally difficult to get comfortable with corporate governance of many Chinese companies or to get a sense that you're getting a full and transparent view of the business.
"There's a pretty deep-seated skepticism about Chinese companies — that they're not really being straight with you," said Landis, who did not attend the Xiaomi roadshow. He cited Alibaba's subtle move in 2011 to transfer control of Alipay to a separate entity owned by CEO Jack Ma, thus taking value away from Yahoo, which owned a big stake in Alibaba.
"It's not surprising that if you're asking Western investors to value a Chinese company, they get a little bit leery," Landis said.
A Xiaomi spokesperson didn't respond to a request for comment.
Xiaomi also has faces plenty of competitive threats. In addition to the other big smartphone makers like Apple, Huawei, Lenovo and Samsung, the company is up against local low-cost handset makers Vivo and Oppo.
Starting Monday, public market investors will get their first chance to see how the eight-year-old company trades. Landis said he'll keep any eye on it to see if anything pops up that excites him. He invested in Tencent about four years ago when he noticed that its WeChat service was surging in popularity. The stock has soared since then, making Tencent the world's sixth most-valuable company.
"We have to find something that's underappreciated," Landis said.