My feelings about DiDi Global Inc. (NYSE:DIDI) can probably be summed up by saying it’s riskier than a new driver tackling “Death Road.” Otherwise known as the North Yungas Road in Bolivia, it’s one of the most dangerous roads on earth. As Lookers states in an article, “It has been estimated that around 200-300 people die each year on the Yungas Road which is only 3 metres wide.” So what does a long, narrow, dangerous road in the mountains have to do with DIDI stock?
Well, simply put, it’s just as risky as driving down the road. Through my analysis, I’ve come across multiple red flags with regards to Didi’s future and why you don’t want to find yourself on that slippery path with Didi in the driver’s seat.
Its IPO Didn’t Deliver Results
Didi Global started trading on the U.S. stock market June 30, 2021. It was the largest IPO of a Chinese company since 2014, when Alibaba Group Holding Limited (NYSE:BABA) raised $25 billion.
As defined by Yahoo! Finance, Didi Global is “a mobility technology platform, provides ride hailing and other services in the People’s Republic of China, Brazil, Mexico, and internationally” and is often referred to as the “Uber of China.” It raised $4 billion through its IPO with a trading debut price of $14 per share.
It now trades around $9 or 36% lower than its trading debut in a roughly two month span. Now that initial hype around its IPO has faded, DIDI stock faces a bumpy road ahead. It’s failure to deliver off its IPO may point to the market’s concerns I’m about to outline.
China’s Crackdown on Tech Companies
The first glaring issue is China’s recent crackdown on domestic tech companies. CNBC recently highlighted that China’s crackdown on the technology sector for severe reasons such as cybersecurity, anti-competitive policies and violations of pricing mechanisms that harm competition in its industry is partially to blame for DIDI stock’s woes. Even more problematic is the possibility that Didi could be found in violation of anti-competitive practices.
Didi Global actually found itself the subject of a government probe two weeks before it went public. If they’re found guilty of harming smaller rivals due to its power and lower prices, massive fines could be levied onto it.
A key value in financial markets is transparency. Reuters stated in an article, “The regulator is also examining whether the pricing mechanism used by Didi’s core ride-hailing business is transparent enough.”
As an economist, I always support free competition and am against any artificial factors that distort the markets in any sector. As a financial analyst, I am always supporting transparency and integrity in financial markets. This is more or less a good thing for the security of the market, but very bad for DIDI stock specifically.
Delisting Dangers and a Financial War
There have been rumors that Didi Global may decide to go private to calm conjecture into the government probe. Didi itself responded, saying it wasn’t true.
However, at the same time, Bloomberg published an article saying the SEC has blocked all incoming Chinese IPOs until they “boost disclosures of risks posed to shareholders.” This could be indicative of a “financial war” between the U.S. and China, or to be more accurate, rising tensions after a period of relative political calm between the two countries as President Joe Biden established his administration. But it’s not a good look for recently listed Chinese IPOs, including Didi.
Further from Bloomberg’s article, SEC Chair Gary Gensler’s said in a statement “I believe such disclosures are crucial to informed investment decision-making and are at the heart of the SEC’s mandate to protect investors in U.S. capital markets.” Personally, I agree wholeheartedly.
DIDI Stock Has a Negative Total Equity
The news directly affecting DIDI stock and indirectly affecting it already says a lot, but to quickly prove my point on a fundamental level, let’s look at financials. There are three key metrics to consider. First, the company is unprofitable as of 2018, losing $1.52 billion in 2020. Second, it burned $703.54 million in free cash flow the same year.
Third, it’s balance sheet on MarketWatch shows that Didi Global had a negative Total Equity of $11.64 billion in 2020. In other words, it has more liabilities than assets. In the hypothetical case it was liquidated today, its assets wouldn’t cover its liabilities — a huge red flag for valuation and stock price performance.
Overall DIDI stock is too risky now. Given the recent news and its poor key financials, I wouldn’t go near it. Remember Death Road — only think of death as red tape and Didi as the driver in your car.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.