DiDi (NYSE:DIDI) made its public debut on the New York Stock Exchange less than a fortnight ago. And despite having a relatively well-received IPO, the DiDi stock price has since plummeted, losing nearly a quarter of its value within the first hour of trading last Tuesday. What happened? And is this a buying opportunity for my portfolio or a sign to stay away? Let’s take a look.
The crashing DiDi stock price
DiDi is a relatively new ride-sharing business that operates predominantly within China. It’s often been dubbed the ‘Uber of China’, which is actually quite accurate given that it has an 80% market share within that region. Globally, it offers its services to over 500m people. That certainly sounds promising to me. So why did the DiDi price crash last week?
It seems that Chinese regulators are pretty unhappy with the company. The Central Cyberspace Affairs Commission (CCAC) has accused the business of illegally collecting user data and has since initiated an investigation into its cybersecurity practices. Until this investigation is complete, the company has been banned from adding new users to its platform. And the ride-sharing app has been removed from app stores as a consequence. Needless to say, this is terrible news for the company and investors.
However, I’m not entirely surprised this happened. The CCAC advised DiDi to postpone its US IPO until a thorough self-examination was completed. But the IPO went ahead anyway, with a simple note in the prospectus stating, “We cannot assure you that the regulatory authorities will be satisfied with our self-inspection results”.
What’s next for the business?
This regulatory investigation could be merely a short-term problem (albeit an expensive one). Assuming that the company can overcome this hurdle, what does the future look like for the DiDi stock price?
It might actually be quite explosive. According to the management team, by 2040, the total addressable market size for the business could be as large as $16.4trn. That’s a staggering amount of room to grow. And with its international operations outside of China starting to ramp up, the company seems to be on the right path to tapping this opportunity.
But what I find to be most exciting is its investments in autonomous driving. Didi has partnered with Volvo to help develop its fleet of self-driving cars. The technology is called Gemini. It uses an array of sensors such as lidars, radars, cameras, infrared imaging, and 5G communication networks. Suppose this technology receives regulatory approval in the future. In that case, I would expect a massive surge in profitability as drivers are eliminated from the business model. Consequently, I think the DiDi stock price could surge.
The bottom line
The recent drop in the share price may present a fantastic buying opportunity. But it’s not one I’m interested in. Being investigated by regulators is a serious red flag in my experience. Suppose the company is found guilty of illegal data gathering or is found to have cybersecurity flaws. In that case, beyond the legal penalties, I think it’s pretty likely that users will flock to a different platform to protect their privacy.
Therefore, I’ll be waiting to see the results of the CCAC’s investigation before making any investment decision. In other words, DiDi is staying on my watchlist for now.