Here’s why the DiDi share price is crashing

The DiDi share price continues to crash following rumours of incoming legal penalties from Chinese regulators. Zaven Boyrazian investigates.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »