With DiDi Global (NYSE:DIDI), do you buy while there’s blood in the streets, or do you wait for the dust to settle? That’s the question many investors are asking themselves about DIDI stock after the China-based ride hailing company on Dec. 2 filed papers to delist its shares from the New York Stock Exchange. Didi will move to The Stock Exchange of Hong Kong.
On Dec 3, the day after the news broke, the stock tumbled 22.2%. Yet on the following trading day, Dec. 6, the shares bounced back by nearly 10%. And this week, they have trended higher. This suggests that bottom fishers are moving in, in anticipation of big gains following the shares’ recent drop.
As you may recall, DIDI stock went public at $14 per share. However, due to China’s regulatory crackdown and the news of the shares moving off the NYSE, it now trades for around $7 per share, representing a 50% decline. So are the investors buying the stock today making a shrewd move or are the shares destined to plunge further?
At this point, that’s up for debate. On the one hand, some have argued that buying the shares now could pay off if the company decides to redeem its American Depositary Shares at the IPO price.
On the other hand, the situation could play out just like it did for China’s Luckin Coffee (OTCMKTS:LKNCY) after its delisting. All things considered, I would assume that the second outcome is what’s more likely to happen.
I view DIDI stock as a pure gamble today, yet a possible buy down the road. So keep an eye on the name.
The Best-Case Delisting Scenario for U.S. Shareholders
The fact that some investors are diving into DiDi Global today may seem irrational , given that soon its shares will not be traded on one of the main U.S. stock exchanges. Yet after taking a look at recent commentary online, I see why many are deciding to roll the dice.
On Dec 3, a Seeking Alpha commentator Delantha De Silva, broke down the potential scenarios facing DIDI stock, discussing several possible outcomes for the holders of its U.S.-listed shares. One potential outcome could be best described as a “best case delisting scenario.”
Specifically, DiDi Global would redeem the NYSE-listed shares at the IPO price of $14 per share. The commentator, however, didn’t explicitly argue that DiDi would pay the holders of its ADS $14 per share.
But other commentary have suggested that DiDi would take that step due to the class action lawsuits filed after its disaster of an IPO. All of this speculation has probably been convincing speculators to buy the shares in recent days.
I don’t think that buying DIDI stock is worthwhile at this point. Although the company could wind up redeeming its ADS for $14 per share, resulting in a more than 100% return for the speculators, I believe that another fate awaits its NYSE-listed shares. It’s an outcome that’s negative for its existing shareholders, but it could create a good buying opportunity if it materializes.
A Possible Move to the Over-the-Counter (OTC) Market
Instead of the company buying out the existing holders of DIDI stock, I believe that the shares, after being delisted from the NYSE, will move to the over-the-counter (OTC) market. As I mentioned above, another delisted China stock, Luckin Coffee, suffered that fate.
Obviously, beyond the China connection, this is an apples-to-oranges comparison. For Luckin, allegations of financial fraud led to its delisting. In DiDi’s case, the delisting was caused by China’s regulatory crackdown. But in terms of future stock price movements, it could be a case of history repeating itself or at least rhyming.
In other words, if it’s announced that DIDI stock is moving to the OTC market, expect its shares to drop further. That’s what happened to Luckin, although there was a one month gap during which its shares didn’t trade anywhere.
However, after Luckin’s shares bottomed, they recovered, rebounding to a price based more on the perceived value of the company’s underlying business. In theory, the same thing could happen to Didi, which is still touted as China’s answer to Uber Technologies (NYSE:UBER).
The Bottom Line on DIDI Stock
Put simply, acquiring this stock in the hopes of a $14 per share buyout is a pure gamble at best.
There may, however, be good reason to buy DIDI stock if it moves to the OTC after it’s delisted from the NYSE. That’s assuming, of course, that the company’s underlying business stays stable or better yet bounces back after China’s crackdown reduces its user base by 30%.
Didi could tumble further going forward. But if the stock bottoms out after moving to the OTC market, the shares may be worth a look.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.