DiDi Global (NYSE:DIDI) stock is under constant selling pressure because management initiated an initial public offering (IPO) without the Chinese government’s blessing.
Since then, shareholders have faced an uphill battle to buoy the stock price.
The Chinese government almost immediately removed Didi from app stores after its IPO, accusing the company of violating data security rules.
China passed a data protection law that will take effect on Nov. 1. Since China did not have the law in place at the time of Didi’s public listing, investors argued that the ride-hailing company did not break any laws.
Investors have no power to question the Chinese government. Selling the stock or avoiding it is the only recourse. Yet avoiding the relatively inexpensive valuation is hard to do.
For example, Uber (NYSE:UBER) trades at a market capitalization of around $80 billion, almost double that of Didi’s $42 billion market cap. Investors could look at Lyft (NYSE:LYFT) instead, which is smaller in size. But LYFT stock trades at a 7 times price-to-sales multiple, compared to 1.7 times for Didi shares.
Earlier this month, Bloomberg reported Beijing’s City Government would invest in Didi. Shouqi Group and other state-run companies in the city would invest in Didi. The rumors sent the stock back to around $9. It fell again when Beijing denied the report.
Truth, Rumor and a Closer Look at DiDi Stock
All rumors have some truth. President Xi Jinping introduced sweeping regulations to address social inequality.
This includes avoiding the influence of foreign countries. Privatizing Didi would minimize the outside world’s intervention. Furthermore, foreigners would not have access to Didi’s vast wealth of consumer data. Instead, China’s government would potentially have access to it.
As you can see in the chart above, Didi does not have a growth score yet. Its expected growth rate next year outpaces that of the industry and the S&P 500.
Investors cannot realize the upside in Didi’s growth rate next year if the stock is taken private.
Trading at 52% below its 52-week high, value investors may bet that Didi bottomed at just above $7.00. Buyers lifted the stock in late July and again a month later. Didi would have broken out above $10 if the government took steps to privatize Didi.
Few analysts are willing to risk their career assigning a price target on Didi. Only one analyst has a “hold” rating on the stock with a $12 price target, according to Tipranks.
The analyst rated the stock over two months ago. Since then, China has issued many new regulations that are hurting all stocks based in the country.
China’s incessant regulatory crackdown is hurting widely-followed companies. On Aug. 31, China’s market regulator proposed amendments to an e-commerce law. It would revoke licenses if platforms fail to take the steps against vendors who infringe on intellectual property rights.
The State Administration of Market Regulation (SAMR) posted on its website that it will welcome amendments for public review before Oct. 14.
Investors may look at China’s enforcement of IP as a positive development. It would have the same standards as that of the U.S.
Also, the lack of consumer protection empowered companies. Now, companies must operate fairly and honestly. IP protection complements China’s anti-monopoly laws. China’s State Council and the Communist Party of China’s Central Committee’s improvements to the rule of law will weaken corporate power over the people.
China further protected consumers by forbidding the “platform to sign on drivers or vehicles that are unlicensed.” Didi reimburses unlicensed drivers who get fined by authorities. This undermines the government and is a risky move.
Still, Didi needs to keep its fleet in service. It will need to run promotional events to attract licensed drivers. It may have to cut commission costs to make it worthwhile for new drivers to join Didi’s fleet.
China’s cybersecurity division is reviewing Didi’s operations. Investors may bet that the ongoing investigation will end with no new restrictions or punitive actions. Shareholders should expect that Didi must update its data management process to protect its information.
This is a large undertaking that will hurt earnings in the near term. When Didi earns the government’s approval on meeting cybersecurity requirements, easing restrictions will lift the stock.
Didi is worthwhile speculation. Investors who have strong nerves to stomach the regulatory risks will get rewarded. Due to the high risks, investors should set a downside price to minimize losses.
The Chinese government could extend its probe into the company. It could demand that Didi implement expensive solutions. Either scenario would hurt the turnaround play.
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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.