Avoid DiDi Global Amid a Government Crackdown

Stocks to sell

The timing of DiDi Global’s (NYSE:DIDI) initial public offering could not have been any better. Insiders and early investors probably knew about the Chinese regulatory crackdown days after its IPO. They lost the least after DIDI stock plunged. Speculators who bought the stock are in for a rough ride next.

DiDi logo on smartphone.

Source: Piotr Swat / Shutterstock.com

What will happen to DIDI stock as Chinese regulations cast a dark cloud on the company’s worth?

DIDI Stock Falls

Investors think of DIDI as the Uber (NYSE:UBER) of China as the stock rose by almost 30% on the day of the IPO. DIDI quickly lost steam next, probably because markets grew nervous with the peak $77 billion market capitalization.

In 2016, DiDi bought Uber’s  separate business in China. It runs a popular ride-hailing service in the region.

Softbank Vision Fund and Tencent (OTCMKTS:TCEHY) are early backers in DiDi. The IPO gives them a profitable path out of the company.

Fundamentals do not support a sustainable business model. Mounting losses may hurt the stock’s price in the long term but that depends on stock market conditions. Furthermore, markets are treating DiDi as a technology or data company. In its press releases, DiDi describes itself as “the world’s leading mobility technology platform.” With negative margins and negative profits, DIDI stock is speculation.

Regulatory Crackdown

On the weekend of U.S. Fourth of July holiday, DiDi announced an app takedown in China. The Cyberspace Administration of China (CAC) said that the DiDi Chuxing app was collecting personal information in violation of Chinese law. The CAC notified app stores to take down the DiDi Chuxing app in China.

Until DiDi complies with ensuring the security of users’ personal information, Chinese users may no longer download the app. Existing users may still keep using the app. This will severely restrict DiDi’s growth prospects. It will now have zero new user growth and will depend on its existing customer base for revenue.

Unknowns Ahead

Investors have no idea when the CAC will permit DiDi’s app to return to the app store. In 2019, China unexpectedly started a system upgrade from May to the end of June for many apps. This included Momo (NASDAQ:MOMO), with 113 million users at the time, and Bilibili (NASDAQ:BILI), with 100 million users in 2019.

This time around, heightened tension between the U.S. indices and China-based firms is worsening. Even the S&P Dow Jones’ addition of DiDi to its index will not help DIDI stock.

Didi's sentiment score

Source: Stock Rover

DIDI shares score just 6/100 on sentiment. The downtrend is so severe that the score may fall to zero next.

Momentum investors may look for a rising score before buying. Otherwise, risks are high that DiDi will keep falling. The reversal will not happen until the company resolves political unknowns.

As expected, BILI, MOMO, and Alibaba (NYSE:BABA) shares fell in sympathy with DiDi. Investors are fearful that the CAC will impose harsh restrictions and implement new regulations that will punish shareholders. Alibaba already paid a record $2.75 billion fine for anti-monopoly violations. That settlement did little to stop the stock from continuing its decline.

DiDi shareholders face bigger unknowns. The original investment thesis for buying DiDi is broken. It may have a moat in the ride-hailing business in China. Now, it faces regulatory hurdles before any new customers may download the app.

IPO investors who thought they could buy DIDI stock for a quick trade probably did not sell fast enough. That trade is now a long-term investment. Its chances of rebounding are very low.

China Crackdown Explained

The Chinese government may have wanted to restrain DiDi from building a database on Chinese citizens that were better and more detailed than its own. If it did not crack down on DiDi, the company would have the itinerary, purchasing and cell phone data of its customers. That is a position that the government would not allow.

DIDI shares may stage a relief rally or they could keep falling.

No one knows.

The regulatory overhang is a risk that investors should avoid. That would mean that investors should avoid holding DIDI stock.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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