Here’s why the DiDi share price is crashing

Businessman looking at a red arrow crashing through the floor

The DiDi (NYSE:DIDI) share price is having a pretty tough time since its IPO last month. After seeing a quarter of its price wiped out following the announcement of a regulatory investigation, the stock has since continued its downward trajectory at an accelerated pace. Let’s take a closer look at what’s going on. And see whether this is a buying opportunity for my portfolio.

The crashing DiDi share price

I’ve previously explored what’s been happening to DiDi’s share price. But as a quick reminder, DiDi is a ride-sharing company, similar to the likes of Uber, operating mainly out of China. Despite having a successful IPO that helped raise $4.4bn, the company quickly began facing pressure from Chinese regulators regarding its cyber-security and data collection practices. Consequently, the ride-sharing app was removed from various mobile app stores, slamming the brakes on its growth.

Since then, things appear to have got worse. Last week the DiDi share price collapsed another 30% after a Bloomberg article was published stating that “Chinese regulators are considering serious, perhaps unprecedented, penalties for Didi”. I can only speculate what form of penalties the Chinese Central Cyberspace Affairs Commission has in mind. But I wouldn’t be surprised to see a significant financial forfeiture or a mandatory introduction of the state as a major stakeholder in the business. After all, this is what happened with Alibaba when it was being pursued by regulators earlier this year. Needless to say, this is not a good sign for this newly minted public company. So, I’m not surprised to see the DiDi share price collapse on the news.

The DiDi share price has its risks

Is there a light at the end of the tunnel?

As bad as this news is, it may not be the doomsday story many suspect. Firstly, there has been no official confirmation that legal action is being brought against DiDi. Therefore, at this stage, it seems investors are reacting to rumours rather than concrete facts.

However, let’s assume legal action does take place. What would a fine look like? It’s impossible to say for sure. But using Alibaba as reference, I can make an educated guess. Alibaba had to pay $2.8bn, roughly 4% of its 2019 annual domestic revenue. Assuming a similar fine is issued to DiDi, that would be the equivalent to $815m.

This would cause some significant pain for DiDi and its share price. Plus, any guilty conviction would adversely impact its reputation. However, while substantial, these are ultimately short-term problems. DiDi had around $7.3bn of cash on its balance sheet as of the end of March. That quite a large pool of funds to draw from should a fine land on its doorstep, even if it’s bigger than my prediction.

The bottom line

The recent downward momentum of DiDi’s share price has brought the valuation to relatively cheap levels. Based on its current market capitalisation of around $38.8bn, it’s trading at a price-to-sales ratio of 1.9. To me, that looks like a bargain, assuming it can overcome the legal hurdles that lie before it.

Having said that, at this stage, I feel there isn’t enough information available to make an informed investment decision. Therefore, DiDi is staying on my watchlist for now.

The post Here’s why the DiDi share price is crashing appeared first on The Motley Fool UK.

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More reading

  • What’s going on with the DiDi stock price?
  • Should I buy Didi or NIO stock?
  • Newly-listed DiDi is tumbling already. Would I buy it?
  • Is the Didi Global share price set to crash after last week’s IPO?

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.