DiDi Global (DIDI -3.27%), the largest ride-hailing company in China, burned many investors after its IPO on June 30. DiDi priced its shares at $14, but they're now trading at about $7.
Shortly after Didi's IPO, the Cyberspace Administration of China (CAC) abruptly suspended all new user registrations for DiDi's app within the country as part of an industrywide cybersecurity review. The CAC also ordered the removal of DiDi's app from all of China's mobile app stores.
In July, China sent personnel from seven government agencies to conduct the cybersecurity review at DiDi's offices. Subsequent reports suggested DiDi could face a major fine, a suspension of certain operations, the introduction of a state-owned investor, or the forced delisting of its shares in New York. The Wall Street Journal claimed DiDi had considered taking itself private, but DiDi denied those rumors.
Image source: Getty Images.
Earlier this month, China's Ministry of Transportation started drafting new rules to protect the rights of contract drivers and cap the percentage of their earnings retained by ride-hailing companies. China also passed a new data security law, which will go into effect on Nov. 1, aimed at prohibiting the "excessive collection of personal information and big data-enabled price discrimination."
All those unpredictable headwinds, along with a new U.S. law that could delist most Chinese stocks in the near future, cut DiDi's stock in half. But could this hated stock bounce back over the next five years?
2021-2022: Overcoming the regulatory challenges
DiDi's app remains online for its existing users in China, but the suspension on new downloads and registrations could throttle its near-term growth. Therefore, the biggest challenges for DiDi in 2021 and 2022 will be to bring its app back online, comply with China's new cybersecurity, data privacy, and labor regulations, and allay investors' fears about a potential delisting.
DiDi isn't the first Chinese company to face a suspension of its app. Momo's two main dating apps (Momo and Tantan) were suspended for a few months in 2019 over inappropriate content. Tencent temporarily suspended its new user registrations on WeChat in late July, but resumed normal operations in early August after complying with the new data privacy laws.
Even as new registrations and downloads were suspended, DiDi's ride-haling orders in China still rose 13.1% in July over the previous month, according to the Ministry of Transport, outpacing the 10.7% growth for the entire market. Those numbers indicate DiDi's revenue -- and stock -- might surge once its app comes back online in China.
2023-2024: All eyes on the U.S. and overseas markets
However, those gains could be capped by delisting threats in the U.S. The Holding Foreign Companies Accountable Act, which enjoys bipartisan support, will require all foreign companies to comply with tighter auditing rules within the next three years or be delisted from U.S. exchanges.
U.S. and Chinese regulators could also close the VIE (variable interest entity) loophole that let Chinese companies list shares of overseas shell companies (usually in the Cayman Islands) to circumvent China's restrictions on foreign investments in sensitive sectors like technology and education. If VIEs are banned, Chinese tech giants like DiDi, Alibaba, and Baidu -- which all use that controversial ownership structure -- could be forced to delist their shares.
Meanwhile, DiDi will likely focus on diversifying its business away from China, where it generated roughly 98% of its revenue last year. It already owns Brazil's 99 Taxis, stakes in Lyft and Singapore's Grab, and it's expanding its namesake app across Japan, Australia, New Zealand, Latin America, South Africa, Russia, Eurasia, and Canada.
DiDi is also expanding its ecosystem with bike-sharing services, vehicle leasing services, freight services, and an overseas food delivery platform. All those moves could make DiDi a much better diversified company within the next two to three years.
2025-2026: Autonomous cars and long-term growth
Like Uber and Lyft, DiDi expects autonomous vehicles to reduce its dependence on human drivers. It already owns over 100 driverless vehicles, and it tested out a fleet of driverless taxis in Shanghai last year.
The Chinese government wants semi-autonomous vehicles to account for half of the country's new auto sales by 2025. Therefore, Chinese companies that are expanding their driverless networks -- such as DiDi and Baidu -- might receive significant support from government subsidies.
The global ride-hailing market could still grow from $113 billion in 2020 to $230 billion by 2026, according to Mordor Intelligence. If DiDi merely matches the company's estimated compound annual growth rate of 8.75% from 2021 to 2026, its revenue could rise from $30 billion this year to $46 billion in 2026.
If DiDi's price-to-sales ratio rises from just over one times this year's sales and matches Uber's ratio of five, it could be worth $230 billion by 2026 -- nearly 13 times its current market cap of $37 billion.
The bottom line
DiDi might generate multibagger gains over the next five years if everything goes right. But a lot of things could go wrong, and DiDi's stock could be delisted long before investors can profit from its long-term growth. So for now, DiDi remains a speculative stock instead of a viable long-term investment.
