DiDi Global (DIDI 1.60%) was one of the worst-performing IPOs of 2021. China's top ride-hailing company went public at $14 per share last June, and its stock rose to about $18 by the end of that month. But that turned out to be DiDi's all-time high.
A series of unfortunate events subsequently occurred, and DiDi's stock price plunged to less than $2 -- which reduced its market cap from nearly $80 billion to about $8.5 billion. Let's review the seven red flags that caused investors to dump DiDi, and why this beaten-down stock still isn't a great value at 0.3 times this year's sales.
Image source: Getty Images.
1. The suspension of its apps in China
The first red flag appeared just a few days after its public debut. Citing vague cybersecurity and data privacy issues, China's regulators abruptly forced the country's app stores to suspend all of DiDi's apps.
DiDi's existing users could continue using the app, but that suspension -- which hasn't ended yet -- has hindered its ability to gain new users in China.
2. A costly overseas expansion
DiDi has been expanding its overseas business, which primarily operates in Europe and Latin America, to reduce its dependence on China.
DiDi's international revenue rose 57% year over year to 2.58 billion yuan ($400 million) in the first nine months of 2021, but the segment's loss widened from 2.02 billion yuan to 3.99 billion yuan ($618 million) on an adjusted earnings before interest, taxes, and amortization (EBITA) basis.
3. Being forced to take more losses in Russia
In late February, DiDi announced it would exit Russia and Kazakhstan to narrow those losses. However, it abruptly walked back its plans to exit Russia -- presumably because Beijing opposes the economic sanctions that were levied against the country in response to its invasion of Ukraine.
DiDi didn't disclose exactly how much money it was losing in Russia, but being forced to stay in a market that is likely unprofitable highlights its painful subservience to the Chinese government. Investors should recall that Uber Technologies (UBER +3.50%) also left Russia last December by selling its stake in a ride-hailing joint venture with Yandex (YNDX +16.14%).
4. New regulations for ride-hailing services
China's regulators also recently drafted new guidelines that will force DiDi and its competitors to reduce their commissions, provide better wages and benefits for their drivers, and limit their usage of personal data. Those requests could all cause DiDi's operating losses to soar.
DiDi's net loss already widened significantly year over year, from 3.38 billion yuan to 49.16 billion yuan ($7.63 billion), in the first nine months of 2021.
5. Even more macro headwinds
Even if DiDi complies with those new rules and the government allows it to relaunch its apps, it will still face major macro headwinds this year.
Rising gas prices could make it difficult for its drivers to turn a profit on each ride, even if DiDi raises its wages. It can raise its fees with gas surcharges, as Uber and Lyft (LYFT +0.41%) have recently done, but doing so could alienate its potential passengers.
The recent resurgence of COVID-19 cases in China -- which just hit their highest levels since 2020 -- has also resulted in new lockdowns. DiDi's growth decelerated during the onset of the pandemic, and it will likely suffer a similar slowdown this year if those cases aren't quickly contained.
6. Its imminent delisting from the NYSE
Last December, DiDi said it would delist its shares from the New York Stock Exchange (NYSE) and pursue a new listing in Hong Kong. At the time, it told investors they could exchange their ADR shares for HK-listed ones.
That decision wasn't surprising, since the U.S. Securities and Exchange Commission (SEC) already plans to delist U.S.-listed foreign stocks -- primarily Chinese ones -- that don't comply with tighter auditing rules soon.
7. An uncertain future in Hong Kong
Even after DiDi announced its delisting plans, some investors still bought the stock as a potential turnaround play. They likely believed DiDi would relaunch its apps in China ahead of the Hong Kong IPO, and that its shares would rally after overcoming its app suspension and delisting threats.
But earlier this month, DiDi suddenly suspended its plans for a Hong Kong listing. The Cyberspace Administration of China reportedly told DiDi its data security measures were still inadequate, and that its apps would remain suspended from app stores. With that escape hatch now locked, it's unclear if DiDi will still delist its NYSE shares -- which exposes it to a forced delisting (and possible liquidation) if it doesn't comply with the new SEC rules.
OTC: DIDI
Key Data Points
DiDi isn't a deep value play
DiDi stock might look tempting when compared to Uber and Lyft, which trade at two and three times this year's sales, respectively. But DiDi is also dirt cheap because its main apps are still suspended, it's being squeezed by government regulators, and its shares could be delisted soon.
Even if DiDi overcomes all those existential challenges, it will still need to deal with the margin-crushing pressure of new labor regulations, higher fuel costs, and its unprofitable overseas expansion. Investors should stay far away from this struggling company and stick with safer tech stocks instead.
