With just a superficial glance at the headlines and highlights of the deal, the $1 billion investment Apple Inc. (AAPL) made in China’s Didi Chuxing — the Uber of China — is compelling, even if not earth-shattering. That amount of cash not only gives it access to Didi as a potential marketing partner, but helps put the American company at least partially back in the good graces of China’s regulators.
Looking past all the rhetoric and self-congratulatory back-patting though, the deal raises concerning question that have thus far been glossed over by Tim Cook & Co.
The biggest of those questions: Exactly why does Apple believe this investment in Didi Chuxing will actually make Apple stock worth more than it is today? So far, all the upsides of partnering with Didi are little more than premises.
Apple Now Owns a Piece of Didi Chuxing
The deal didn’t take long to take shape. After meeting with China’s ride-sharing service Didi Chuxing’s management in April, Tim Cook announced Thursday evening Apple was investing $1 billion in the organization.
There’s no questioning Didi’s dominant position. It owns 90% of China’s market, not letting the United States’ Uber gain any significant foothold there. Didi Chuxing boasts a presence in nearly 400 Chinese cities and 300 million passengers.
Apple CEO Tim Cook commented on the deal:
“We are making the investment for a number of strategic reasons, including a chance to learn more about certain segments of the China market. Of course, we believe it will deliver a strong return for our invested capital over time as well.”
Most observers agree the initial upside for Apple is the distinct possibility that a partnership with Didi brings its customers one step closer to using Apple Pay as the means to purchase a ride via the service. Even beyond that though, as an investor, Apple is better positioned to gain some sort of access to 300 million self-identified digital-savvy customers that may be interested in Apple’s other entertainment-oriented services.
Didi President Jean Liu added to the undefined list of prospects, commenting of the Apple’s new involvement, “We will have many more collaborations down the road.”
Some have even speculated this is the next step towards the development of a fleet of Apple’s rumored self-driving car.
Questions AAPL Owners Should be Asking
Didi Chuxing has created as much buzz in China as Uber had created in the United States. Buzz doesn’t pay the bills though, and like the United States’ Uber, Didi Chuxing isn’t profitable.
It is inching its way into the black, reporting half of its locales broke even as of February. The pace of that progress remains unclear though, and Apple’s investment in the company solely as a ride-sharing operation hardly looks like it will offer the “strong return for our invested capital” Tim Cook described anytime soon.
Against that backdrop, the only aspect of the opportunity owners of AAPL stock can afford to be excited about is Didi Chuxing as business partner, and a co-developer of technologies. Even then, however, there are no guarantees.
One of the reason Apple Pay has been slow to take off is the preference for the comparable Alipay, from Alibaba Group Holding Ltd (BABA) — Alipay controls 70% of China’s mobile payment market share.
It matters, because Alibaba is also an investor in Didi Chuxing.
Sure, there arguably room for two payment middlemen. Alipay is established though, and China’s government has strongly encouraged the utilization of home-grown solutions when possible.
If instead, Apple’s ultimate ambition is using Didi’s 300 million customers as a captive audience to promote its entertainment offers, it’s largely going to be squaring off against Tencent Holdings (TCEHY), which sells (among other things) online games and digital content, as well as Alibaba’s recently expanded online video service.
Tencent Holdings is also an investor in Didi Chuxing, creating a potential internal conflict that could leave Apple proverbially playing second fiddle.
Bottom Line for Apple Stock
None of this to say there’s absolutely no payoff in sight for Apple down the road, either as an uninvolved investor, or as a partner of Didi Chuxing. It is to warn owners of AAPL stock, however, that a closer reinspection of the deal’s details speak at length about several things that could happen at some point in the distant future, but don’t speak at all about what’s even just likely to happen in the near future.
Without any specifics, the news of the deal with Didi is just noise. Apple — and Tim Cook in particular — are in no position to simply throw spaghetti on the wall to see what might stick.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.