Should You Buy the Dip in DiDi Global? China-based DiDi Global's (DIDI) shares have lost roughly 33% since the company's impressive stock market debut on June 30 due to a crackdown by China...

China-based DiDi Global's (DIDI) shares have lost roughly 33% since the company's impressive stock market debut on June 30 due to a crackdown by China's regulatory authorities. But can the stock rebound in the coming months on its market dominance in China's ride-hailing service sector ? Read on for some insight.

Headquartered in Beijing, China, mobility technology platform operator DiDi Global Inc. (DIDI) had an impressive stock market debut on June 30, 2021. However, the stock's price has declined by roughly 33% since the listing, to close yesterday's trading session at $11.16.

A recent report by the Cyberspace Administration of China (CAC) stated that the company violated several laws and regulations in relation to users' personal information. The report was primarily responsible for the shares' decline.

Furthermore, China's cyberspace regulators have been imposing tighter restrictions on data collection and data storage, and tightening rules for companies listed overseas or seeking to sell shares abroad, which is expected to continue affecting DIDI, among other China-based companies. In addition, the company has reported losses over the last three years. So, we think DIDI's near-term prospects look uncertain.

Click here to check out our Software Industry Report for 2021

Here's what we think could shape DIDI's performance in the near term:

Impressive IPO

DIDI was the second-largest U.S. IPO by a Chinese company after Alibaba Group Holding Limited (BABA), which made its stock market debut in September 2014. DIDI raised $4.4 billion in its IPO, giving it a valuation of roughly $73 billion on a fully diluted basis and $67.5 billion on a non-diluted basis. The volatile IPO environment reduced the company's IPO price and made its valuation attractive. However, the stock has since plunged due to the aforementioned concerns.

Data Security Concerns

DIDI had to suspend new user registration in China on July 2 pursuant to the announcement posted by the PRC's CAC, which subjected the company to cybersecurity review. On July 4, the CAC confirmed that the "DiDi Chuxing" app was collecting users' personal information in violation of relevant PRC laws and regulations. Consequently, several app stores were notified to take down the app in China. This is expected to have an adverse impact on DIDI's revenue in China.

Several law firms have also filed a class action lawsuit against DIDI for violations of federal securities laws. It is alleged that the company made false and misleading statements to the market. Also, on July 5, The Wall Street Journal reported that the CAC had asked DIDI, as early as three months prior to the IPO, to postpone the offering due to national security concerns and to "conduct a thorough self-examination of its network security."

Poor Profitability

In terms of trailing-12-month gross profit margin, DIDI's 6.98% is 75.9% lower than the 28.98% industry average. The stock's trailing-12-month ROTC and ROTA are negative compared to the industry averages of 5.69% and 4.14%, respectively. Its trailing-12-month net income margin and levered FCF margin are also negative versus the 5.11% and 8.45% respective industry averages.

POWR Ratings Reflect Uncertain Near-Term Prospects

DIDI has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, DIDI has a C grade for Quality, which is in sync with its lower-than-industry profitability ratios.

The stock has a C grade for Growth. This is justified given that analysts expect its revenue to increase 24.7% year-over-year to $38.70 billion in its fiscal year 2022 but its EPS is expected to remain negative for the quarter ending September 30, 2021, and in its fiscal 2021.

DIDI has a C grade for Value, which is consistent with its forward EV/S and P/S of 2.76x and 1.93x, respectively, which are higher than the 1.94x and 1.60x industry averages. The stock has a D grade for Stability.

DIDI is ranked #78 of 131 stocks in the D-rated Software – Application industry. Click here to see DIDI's ratings for Sentiment and Momentum as well.

Better than DIDI: Click here to access several top-rated stocks in the same industry.

Bottom Line

DIDI has significant market dominance in the ride-hailing space in China. It also offers a wide range of app-based services across Latin America, Africa and Russia. However, owing to data security violation concerns, it has run into trouble with the regulatory authorities in China. Also, analysts expect its EPS to remain negative in the coming quarters. So, we think it's better to wait before adding the stock to your portfolio.

Click here to check out our Software Industry Report for 2021

DIDI shares were trading at $11.40 per share on Tuesday morning, up $0.24 (+2.15%). Year-to-date, DIDI has declined -19.38%, versus a 17.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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