As a result of the Chinese government’s regulatory crackdown on large Chinese companies, many of these stocks, including ride-hailing company Didi Global (NYSE:DIDI), are being ignored by investors. In the case of DIDI stock, it’s lost close to 40% of its IPO value since going public just over two months ago.
I put DIDI stock on a list of 10 Chinese Stocks to Buy on the Dip in mid-August. At the time, I felt like it was a good buy for aggressive investors. However, since then, things appear to have gotten increasingly dicey for DIDI shareholders.
While the stock is trading about 5% higher since the time of my commentary, I’m left wondering if buying on the dip could be a mistake. Here’s why.
Didi in Hot Water With Chinese Regulators
This week, Chinese regulators interviewed ride-hailing firms including Didi after alleging they are recruiting unapproved drivers and vehicles. This is just the latest in Didi’s run-ins with the Chinese government as the tech crackdown in the country escalates.
In July, Didi executives went forward with the U.S. initial public offering against the advisement of China’s cybersecurity regulator. Days later, the cybersecurity watchdog told the company to stop signing up new users until officials were able to examine Didi’s practices. Then Didi’s apps were taken off mobile stores. The company has also been hit with fines for antitrust violations.
Now, these blows aren’t exactly shocking given Didi’s history of operating in regulatory gray areas and the Chinese government’s hard-line stance on Big Tech. But they do keep coming.
While I think the problems Didi is having will get sorted, there is, of course, no guarantee. In my August commentary recommending DIDI stock, I agreed with InvestorPlace’s Ian Bezek that shares weren’t going anywhere until investors got clarity on the regulatory issues Didi faces.
Another one of my colleagues recently issued a warning on DIDI stock. According to InvestorPlace contributor Mark Hake, shares could lose two-thirds of their value if Didi’s regulatory issues force it to stop doing business in China.
Didi is the largest online ride-hailing platform in the world, operating in 15 other countries. However, as Hake points out, revenue outside China accounts for just 2% of its business. If the company was to exit the Chinese market, DIDI stock would take a massive hit.
Hake recommended investors avoid DIDI stock at least until after they see the company’s next quarterly earnings report and outlook from management. The company is slated to report earnings on Dec. 1, according to The Wall Street Journal. In other words, we’ve got a while to wait before getting a better picture of the effect of not being able to sign up new users in its largest market.
That being said, Didi had 493 million annual active users on its global platform, three-quarters of which are in China. And it averaged 41 million daily transactions in the 12 months ended March 31. Therefore, it’s unlikely that Didi’s app will remain offline forever. In addition, it’s hard to imagine the Chinese government sending the service on a permanent hiatus due to privacy concerns.
The Bottom Line on DIDI Stock
I think the odds of China giving up on Didi are higher than Didi giving up on China. That said, I don’t think they’re very high. At the end of the day, this is what makes investing so difficult.
We don’t know at this point what the Chinese government’s long-term plans are beyond the Nov. 1 introduction of the Personal Information Protection Law (PIPL), which puts restrictions on user data collection.
Didi has a lot to overcome in the immediate future. Should these issues be resolved, though, there is no way DIDI stock remains in the single digits. So, and this is only for the most speculative investors, you could consider buying on the dip, with the proviso that another dip might occur before the end of the year. All others should avoid the stock for now.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.