DiDi Global (DIDI -2.24%) and Meituan (MPNG.Y -4.21%) have both been hammered by China's crackdown on its top tech companies over the past year. DiDi, which owns China's largest ride-hailing platform, went public in June at $14 per share. But shortly after its public debut, the Cyberspace Administration of China (CAC) suspended all-new user registrations for DiDi's app and ordered its removal from all of China's mobile app stores. DiDi's existing users and drivers can still access its services, but the lack of clarity regarding its future growth has reduced its stock price to about $8.

Meituan, which owns one of China's largest on-demand delivery platforms, was hit by an antitrust probe in April. As a result, its over-the-counter (OTC) shares plummeted from a 52-week high of $118 in February to just under $50 in late August. However, the State Administration for Market Regulation (SAMR) wrapped up that probe in October with a lower-than-expected fine, and Meituan's stock rebounded to around $70 per share.

A smartphone user in Shanghai.

Image source: Getty Images.

Many investors might be reluctant to touch either Chinese tech stock as the regulators continue their unpredictable crackdowns. But is either of these tech giants a better buy for more daring investors who can tune out the noise?

DiDi's future remains uncertain

DiDi generated 94% of its revenue from its Chinese mobility services, which include its ride-hailing and ride-sharing services, in 2020. It's also been gradually expanding into overseas markets like Singapore, Japan, Russia, Australia, New Zealand, Canada, and Latin America.

DiDi's revenue rose 14% in 2019 but fell 8% to 141.7 billion yuan ($22.2 billion) in 2020 as more people stayed at home during the pandemic. In the first quarter of 2021, its revenue surged 106% year-over-year to 42.2 billion yuan ($6.6 billion) as it faced an easy comparison to the onset of the pandemic a year earlier. It ended that quarter with 493 million annual active users.

The company posted a net loss in 2019, followed by a wider loss of 10.6 billion yuan ($1.66 billion) in 2020 amid rising COVID-19 expenses. But in the first quarter of 2021, it generated a net profit of 5.5 billion yuan ($860 million).

The post-pandemic growth looks promising, but it hasn't posted its second-quarter earnings report or provided any clear updates regarding the future of its apps in China yet. Analysts expect DiDi's revenue to rise 38% this year and grow another 19% in 2022, but it's impossible to tell if those forecasts are accurate without any hard numbers or guidance from the company. Its stock rallied briefly in late October after The Wall Street Journal said the company was considering a listing in Hong Kong. That rumor suggests that DiDi's apps could eventually return to China's app stores, but it also indicates the company could delist its U.S. shares.

Meituan's future looks brighter

Meituan generates most of its revenue from food deliveries, but it also provides deliveries of other in-store products and travel-related bookings. Meituan's revenue grew 18% to 114.8 billion yuan ($17.9 billion) in 2020. Demand for its online delivery services skyrocketed throughout the pandemic, but that growth was partly offset by the softness of its in-store, travel, and hotel booking businesses. Its net profit jumped 110% to 4.7 billion yuan ($740 million) as it curbed its spending on those weaker segments.

In the first half of 2021, Meituan's revenue surged 95% year-over-year to 80.8 billion yuan ($12.6 billion) as the pandemic-related headwinds waned. But it also posted a net loss of 8 billion yuan ($1.3 billion) as it ramped up its spending again. It ended the second quarter with 628.4 million annual transacting users, up 37% from a year ago, while its number of annual active merchants increased 23% year-over-year to 7.7 million.

Analysts expect Meituan's revenue to rise 58% this year and grow another 38% next year, but its bottom line should remain in the red. Those estimates are more reliable than DiDi's forecasts because Meituan's penalties have already been finalized. Meituan must pay a fine of 3.4 billion yuan ($540 million) or 3% of its domestic revenue in 2020. The company must also end its exclusive partnerships with merchants, improve safety standards for its workers, and submit compliance reports to the government over the next three years. Those measures might throttle its near-term growth, but its app remains online and it doesn't face any other major regulatory challenges.

The valuations and verdict

DiDi's stock trades at just 1.3 times this year's sales, but it deserves that discount because its core business remains stuck in the mud in China. Meituan's stock looks pricier at 7.6 this year's sales, but that price-to-sales ratio seems low relative to its growth. Therefore, I believe it deserves a higher premium because the regulatory headwinds are waning. Both of these stocks are risky, but Meituan offers investors a better way to profit from the expansion of China's e-commerce market without having to deal with the regulatory headwinds that are crushing DiDi's stock.