Bottom line: Xiaomi's stock is probably oversold at current levels due to selling at the end of a lockup period, but will remain an underpeformer for at least the next 1-2 years until it can prove its strategy of moving up-market has legs.

It's been a rocky week so far for smartphone wannabe Xiaomi (HKEx: 1810), which is desperately trying to show investors it's more than just a maker of cheap, low-margin products. The company is getting set to unveil a new strategy to show it plans to wean itself from the low-end phones that are its bread-and-butter, with an upcoming announcement that it will spin off its popular Redmi line of cheaper models. (English article)

But that hasn't stopped investors from dumping Xiaomi shares en masse over the last two days, in a major no-confidence vote over whether the company can actually execute that strategy. We should be fair here and note that the share dumping that has seen Xiaomi's stock tank by more than 10 percent is at least partly due to the expiry of a lockup period following its blockbuster IPO last year.

Still, if people had any confidence in this company one would expect that new investors would step in to pick up the shares now being dumped by its impatient early backers. All that said, let's take a closer look at what's happening with Xiaomi these days, exactly a half year after it made an IPO in Hong Kong that was the world's second largest in a banner year for new listings.

We'll start with the actual shares, which fell 6.9 percent on Wednesday, after falling by a similar-sized 7.5 percent on Tuesday in Hong Kong. (English article) At its current level, the stock now trades nearly 40 percent below its IPO price of HK$17 from last July. Not surprisingly, volume was much higher than usual over the last two days due to the expiration of the lockup period.

Xiaomi itself put out a statement saying co-founder and CEO Lei Jun wouldn't sell any of his shares for the next 365 days, in a mostly futile effort to prop up the ticker. At its current level, the company is worth about $31 billion, quite a bit lower than the $45 billion it was worth about four years ago when it was a fast-climbing hot company.

What's Changed?

A few things have changed since the IPO, but the biggest for investors was that Xiaomi's comeback story came to an abrupt end in last year's third quarter when it stopped posting explosive growth and its shipments actually contracted. (English article) Before that people were already skeptical about its heavy reliance on low-end phones from its Redmi line, even though the company is profitable overall.

Xiaomi is trying to take on its skeptics by launching a new plan this week that will see it spin off Redmi into a separate unit, and try to become a multi-brand company. This particular strategy actually dates back to late last year, and has seen Xiaomi launch the Black Shark brand targeted at gamers, and another high-end brand called Poco. It has also launched phones together with selfie specialist Meitu (HKEx: 1357) seeking to tap the market for people who like to take pictures of themselves.

But people don't appear to be listening to that diversification story, probably because it's far easier to say you want to go upmarket and far harder to do. I can remember a period a few years back when smartphone loser Lenovo (HKEx: 992) was doing similar things, launching different brands on a regular basis in search of one that would stick. Personally speaking, I do think Xiaomi might be a bit oversold at the moment. After all, the company is still the world's fourth largest smartphone brand, which includes its recently earned crown as the biggest player in India.

At the end of the day, Xiaomi still needs to show it can attract and retain users to its brand, not just because of price but because of quality and unique experience. Fragmenting yourself into lots of smaller brands may not be the best way to do that, and may only serve to distract the company.

One of my contacts who follows these things says Xiaomi's latest higher-end models have sold relatively well, meaning there probably is an audience out there for these products. But until it can start to sell those phones in meaningful numbers, which may take at least another year or two, if ever, the stock could remain an underperformer.