It’s been quite an eventful year for Chinese ride-hailing giant DiDi Global (NYSE:DIDI). It had one of the largest IPOs in recent memory in June, but only to see DIDI stock lose more than 40% of its then-newfound value.
Beijing’s crackdown on Chinese tech companies such as DiDi has wiped away billions of dollars from their valuations. Moreover, it seems that the Chinese government isn’t stopping anytime soon, limiting DIDI stock’s upside.
DiDi is currently the largest ride-hailing company globally in terms of revenue, which is double that of Uber (NYSE:UBER). That incredible IPO raised over $4.4 billion, taking its valuation to a whopping $73 billion on a diluted basis.
However, a month later, the Cyberspace Administration of China (CAC) announced it was opening up an inquiry into DiDi for national security purposes. Since then, DIDI stock has been on a downward spiral and has investors concerned about its future. Moreover, it appears that the government will continue to put roadblocks in front of DiDi, which could lead to state ownership.
Multiple Risks Face DIDI Stock
There are multiple risks that DiDi faces at this time, which strengthen its bear case. Firstly, there is a lack of diversity in its revenues in terms of its geographics and segments.
Uber, for instance, generates a healthy amount of revenues from all of its four revenue-generating segments, including mobility, delivery, freight and others. Moreover, its sales are spread out with several countries contributing, outside of the 60% generated in U.S. and Canada. On the flipside, DiDi generates almost all of its revenues from its mobility segment and China.
The regulator’s crackdown hit DiDi hard, as it’s lost more than 30% of its users. New users were banned from signing up on its platform, and its application was removed from most app stores. It’s clear that we haven’t seen the last of these regulatory incidents, and can happen more often in the long run.
We haven’t quite seen the effects of the crackdown on its financials, though. DiDi hasn’t released its quarterly report in a while now, and its performance is based on its 2021 first-quarter figures.
State-Ownership End Game
Beijing’s efforts to curb monopolistic practices have encouraged new entrants looking to make their mark in the ride-hailing space. To make matters worse, most of these companies are state-owned. For instance, Geely Auto Group’s ride-hailing unit Cao Cao Mobility raised $589 million from state-owned funds. Another company, T3 Chuxing, founded by three of the top state-owned automakers in the country, has been making substantial inroads in the market.
From the looks of it, DiDi was panned by the government for its monopolistic behavior; however, it seems that it’s being singled out here. Naturally, there are ulterior motives behind the government investigation against DiDi. The ultimate goal is likely to turn this company into a state-owned enterprise as well.
However, that limits the company’s growth potential outside of China against industry stalwarts such as Uber. Moreover, state investors would not want different state-owned ride-hailing services competing with each other. Therefore, each company will have to operate within their respective regions. It’s plausible to assume though the state encourages consolidation in the sector.
Final Word On DIDI Stock
DIDI stock has tanked in the past few months after China’s crackdown on tech enterprises. Investors may be thinking about buying the dip, but they’re ignoring the long-term troubles that DiDi faces if they do so.
Beijing is unlikely to loosen the strings, which may eventually lead it on the path to being nationalized. Hence, with the uncertainties and risks surrounding DIDI stock, it’s best to avoid it at this time.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.