DiDi (NYSE:DIDI) stock rallied 10% last week, so it’s time to revisit its bullish thesis.
But, before we move forward, you shouldn’t let that weekly stat fool you, it has been painful owning DIDI stock. There isn’t one reason for what ails it. But the bulk of the blame probably lies in the overall problem in Chinese stocks.
This debacle is long in the tooth. With a bit of luck, it’s coming to an end. That’s especially possible since investors are eager to be bullish again — last week may have been the start of the recovery.
Another contributor to the recent pain in DIDI stock is that investor sentiment on Wall Street has soured in the last few weeks. If you believe the rhetoric, you’d get the impression that the indices fell off a cliff.
In reality, the scoreboard doesn’t reflect that. The S&P 500 is still within 4% of its all-time highs. At the drop of a hat, stocks could break new records even in the next two weeks.
Meanwhile, Chinese equities like DIDI stock are breaking records the other way around. This all started perhaps last year with Alibaba (NYSE:BABA) as the poster child of this problem. Antagonistic comments from its co-founder Jack Ma may have triggered a government crackdown on successful companies. When BABA stock can fall 50%, it’s no surprise to see DIDI stock suffer as well.
DiDi is still too young, so it has not earned investor confidence yet. Unlike BABA, its profit and loss statement is still questionable during these forming stages. This is not an insult against the company, but rather an issue of bad timing. The company came to market in a whirlwind of political pressures and regulatory crackdowns.
DIDI Stock: The Chinese Equity Rout Will End
The descent for Chinese stocks has been incredibly steep. I would expect it to abate, although there have been more squawks from China about gaming limit loopholes this morning. Last week’s strength was encouraging, but I won’t believe it until I see follow through. Until then, investing in DIDI stock remains speculative.
It’s hard enough to invest in new companies because of all the new variables involved. It’s nearly impossible to do it with confidence given this predicament.
For example, I remember controversy about the business when Uber (NYSE:UBER) came to market. But UBER wasn’t under takeover threat from the U.S. government. The company merely had to combat public perceptions of over-spending back then.
On the other hand, the issues for DIDI in China are much more serious. Its entire for-profit existence could be in danger.
Last week’s rally is encouraging, but it brings it back into its failure level from late September. It is likely to face resistance, there but DIDI stock should be able to overcome it. If so, then shares can gather enough momentum to tackle the next level 12% above that.
DIDI May Have Bottomed
Nothing good can happen until the company stops the bleeding. The road to recovery starts with establishing a bottom. In the last two week, DIDI stock bounced yet again off the $7 per share floor. Now the bulls must rebuild positive momentum off it. This may require time, so investors should be patient. Green shoots are sprouting from surprising places. Even though it wasn’t a worry contributing to selloff, new positive tariff rhetoric has helped here.
Meanwhile, active traders have many opportunities to trade around the price action. However, this one would make for an easier long-term bet. The recovery concept involves the entire Chinese equity concept. So it’s in good company, since it’s not likely for it to die altogether.
But make no mistake about it: The price action in DIDI stock is still bearish. The stock is making lower-highs since its IPO. The price range has tightened against the hard floor it just established.
This builds energy. Hopefully it will resolve itself to the upside. Otherwise, if for whatever reason it loses footing, the downside scenario would be grim.
My assumption is that it holds as long as the stock market in general doesn’t correct much further. As such, DIDI stock makes for a solid long-term investment. Since I’ve already identified it as speculative, the size of your investment moving forward should remain appropriately humble.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.