By Brian Lantier, CFA

NASDAQ:AIXI

READ THE FULL AIXI RESEARCH REPORT

On August 23rd, Xiao-I (NASDAQ:AIXI) adjusted the exchange ratio for the company’s ADSs from 1 ADS representing 1/3 of an ordinary share to 1 ADS representing 3 ordinary shares. This adjustment was effectively the same as a 1-for-9 reverse split of the ADS.

We are maintaining our adjusted target valuation of $18/ADS for the time being (9 times our previous target of $2/ADS), but we will revisit that target after the company reports first-half 2024 results.

ADS Ratio Adjustment
The company’s ADSs that trade on the NASDAQ market have been under pressure for much of 2024. The massive investment in large language models and other AI tools by China’s largest tech companies is starting to pay dividends as evidenced by Alibaba’s Qwen model which has begun topping various LLM leaderboards. Other leading technology firms in China including Baidu, SenseTime, and Tencent continue to invest heavily in building new models. While Xiao-I’s core business (principally customer contact tools) remains stable, there is some question as to how effectively Xiao-I can compete in the LLM market.

This adjustment of the ADS ratio has achieved the desired outcome of raising the price of the ADSs above $1 and we expect that if the shares continue to trade above $1 the NASDAQ will issue a notification that the company is in compliance with the minimum bid rule in early September.

We are adjusting our price target and earnings estimates to reflect the lower number of ADSs outstanding as a result of the ratio adjustment. The company will likely report its first half of 2024 results in late September or October and we will reevaluate our target valuation at that time.

Apple Lawsuit Update
Investors may recall that in our initiation report we briefly mentioned that in 2012, the company sued a subsidiary of Apple for patent infringement related to Apple’s Siri tool. Xiao-I alleges that Siri infringes on its intelligent assistant patent. The company updated that lawsuit in 2020 seeking damages in excess of $1.0 billion. We have held the belief that this lawsuit is unlikely to result in a meaningful settlement or win for Xiao-I but given the size of the damages being sought investors should be aware of the suit.

On June 28, 2024, the Beijing Intellectual Property Court upheld the validity of Xiao-I’s patent which allowed the case to proceed in the Shanghai High Court. This week, the company issued a press release indicating that it was notified that the Shanghai High Court wrapped up the trial on July 31, 2024, and the company is now awaiting a verdict.

Any finding in Xiao-I’s favor would be a significant positive catalyst for the shares in the very near term, but we would expect Apple to dispute any verdict in favor of Xiao-I. Given the significantly smaller number of ADSs outstanding today as a result of ADS ratio adjustment investors should be prepared for significant volatility in the shares when the verdict is announced. We have noted a sharp increase in retail trader chatter around this case, so it is possible that any moves in the stock price (up or down) could exceed the fundamental impact of the verdict. The daily volume of the company’s ADSs has continued to climb over the past week (averaging over 450,000 ADSs/day vs a historical average of just 74,000 ADSs per day), even though the total outstanding number of ADSs has been reduced to 1/3 of its previous total.

The company continues to face the challenges of being a smaller player in the AI market with a customer base in China and a list of competitors that includes many of the largest technology companies in the world. The company will report first-half results in September/October 2024 and we expect we will receive additional updates on the company’s future financing plans at that time. For now, we are maintaining our target valuation at $18.00/ADS (9 times our $2.00/ADS target reflecting the ADS ratio change).

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