Chinese smart phone maker Xiaomi stumbled 6 percent on its debut on the Hong Kong Stock Exchange on Monday, but early investor Hans Tung says the company's performance is more reflective of investor confusion than the strength of the stock.
The performance was "probably a combination of both market conditions in the U.S. and China, and investors trying to figure out if [Xiaomi] is a hardware or internet company," Tung, GGV Capital Managing Partner, said on CNBC's "Squawk Alley."
Now the fourth-biggest smartphone player globally, Xiaomi has become known for its wide array of top of the line hardware at affordable price points. It was once considered a major threat to Apple, but investor enthusiasm seems to have cooled.
That may be because Xiaomi, like its U.S. rival, has aggresively pursued internet and services-based revenue.
Apple has already managed to build a $40 billion services unit, projected to make up 20 percent of total revenue by 2023. But for Xiaomi, services are growing more slowly and currently make up less than 10 percent of total revenue.
Tung is confident Xiaomi's services sector will catch up, thanks to the company's extensive hardware ecosystem, which Tung says is "stickier than gadget hardware we see in the U.S." Consumers are initially attracted by high quality hardware. The more devices they have, the more likely they are to use the company's internet services, Tung said.
"Initially you see the hardware sales growing faster. What people miss is the more products you have from Xiaomi at home, consumers end up using internet services more," Tung said. "It is a different kind of business model, where hardware and internet services are linked, and there is a lagging effect you will see growing over time," he added.
Xiaomi's vast ecosystem of hardware has invited some comparisons to Samsung, rather than Apple, but Tung insists the company is different from both.
"I think over time as investors get to know Xiaomi better, will will come to view it as a different kind of hardware company than what we are used to seeing," Tung said.