DiDi Global (NYSE:DIDI), known as China’s Uber Technologies (NYSE:UBER), is now cheaper than its American ride-share cousin. DIDI stock has lost 23% in the last three months to yesterday’s $8.62 a share close, compared to UBER stock’s $46 share price that’s little changed in that time period.
I’m not enamored of Uber. As I wrote recently, Uber has evolved into a carrier of things, not people.
Running taxis, even by computer, turns out to be a tough business. Even if DiDi were into Uber’s diversification, delivering groceries and meals, it might not justify investment. China seems willing to do that without drivers.
If DiDi isn’t allowed to grow, and if there are no profits, what is left of the investment case? There still is one.
Wei Shall Overcome
DiDi Global today is that rarest of birds, detested on both sides of the Pacific. Americans like Jim Cramer hate DIDI stock because its initial public offering was a value trap. He told viewers to buy it, only to see it crash.
No one likes to be wrong. Cramer blamed China’s government, which hadn’t wanted the IPO in the first place.
All ride-hailing apps, whether DiDi or Uber or Lyft (NASDAQ:LYFT), arbitrage a regulatory vacuum. When governments fill the vacuum with regulation, they’re in trouble. In America, this happens slowly enough that ride hailing companies can plan for it, even fight it.
In China, it happens suddenly, and there’s nowhere to hide. Just days after the IPO, Chinese regulators suspended DiDi’s app. The crackdown has continued, with the government seeking to end cross-border data flows.
Even before the IPO, DiDi’s investment case was proving brittle. The company has never made a profit, and growth turned negative during the pandemic. The March quarter showed growth returning but net income was just 1 cent per share.
Co-founder Cheng Wei is a former Alibaba Group Holding (NYSE:BABA) executive. Much of China’s crackdown seems aimed at Alibaba-like disruption. The stock was hit again by rumors co-founder Jean Liu might leave. There were even claims the government would nationalize DiDi.
Growth Worth Paying For
The rumor has proven unfounded. What you’re left with is a market cap of about $40 billion on expected 2021 revenue of $31 billion despite the crackdown. If analysts are right, DiDi’s valuation is almost even with next year’s expected revenue.
That’s growth worth paying for. DiDi doesn’t just operate in China, but in 17 countries. By complying with government mandates and continuing to grow outside China, DiDi could prove a good investment. China’s autonomous car revolution is also miles ahead of that in the west, and DiDi is poised to benefit.
Much of this is speculation. But our Alex Sirois sees an emerging bull case. Didi’s stock is super-cheap when compared with Uber. Most of China’s actions seem focused on improving working conditions, enforcing antitrust, and controlling data flows. They’re regulatory, not confiscatory.
As our Nicholas Chahine writes, this thesis demands patience. China’s broad crackdown on technology has hurt its credibility on Wall Street. There’s Cold War rhetoric in the air. But killing the market isn’t in the government’s best interest, either. There’s some distance between Teddy Roosevelt and Vladimir Lenin.
The Bottom Line on DIDI Stock
For months I have pounded the table for Alibaba. While I see why its valuation has taken a hit from China’s crackdown, I don’t think the east is entirely red, either. Authoritarianism and growth don’t mix, not in an age where trained, motivated, empowered brains are the gating factor to growth. As for DIDI stock? There’s more to it.
I question DiDi’s short-term growth prospects. You’re speculating that the government will soon lift its suspension from the app store. You’re betting that its antitrust crackdown won’t bring scaled competitors to the market.
If you can accept those risks, and if DiDi can overcome its current problems, you’ve got a bargain.
On the date of publication, Dana Blankenhorn held a long position in BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
