It doesn’t get much worse than this for a new public company. Just one month ago, ride-hailing app DiDi Global (NYSE:DIDI) launched its initial public offering (IPO) in New York.
Investors plowed into the highly-anticipated IPO in hopes of buying the Uber (NYSE:UBER) of China on the cheap. Instead, DIDI stock quickly turned into a massive headache.
That’s because the Cyberspace Administration of China (CAC) has cracked down on DiDi and other ride-sharing firms. The CAC stated that DiDi was improperly handling personal information and thus was out of compliance with the law.
Until that problem is rectified, DiDi cannot sign up any new users for its app in China. This will, in turn, greatly curtail the company’s prospects as it can only generate revenue from existing users.
DiDi: Part of a Broader Trend
In theory, the CAC ruling might sound like a simple misunderstanding. DiDi cut some corners on data security, the government complained, and now the two sides will work it out.
Normally, that might be the case. However, the Chinese government has been cracking down on all sorts of publicly-listed firms lately. These include but are not limited to music streaming companies, private education firms, tobacco companies and now video gaming operations.
Thus, the move against DiDi looks less like a regulatory enforcement action and part of a broader pattern of government efforts to curtail private enterprise.
The Chinese government appears to be taking action against firms, such as for-profit education companies, which it sees as acting against the needs of its broader society. Given the centralized control that the Chinese government has, if it decides a company like DiDi is counterproductive to the greater good, there’s not much investors can do about it.
Both DiDi specifically and Chinese tech companies face a broad question. With the flood of capital out of U.S.-listed Chinese stocks, does it make sense to even maintain a listing in New York?
Perhaps a company like DiDi should delist from the U.S. market and return to its roots in China, where it is likely to earn a softer touch from local regulators. At least, that line of reasoning led to an explosive rumor last week.
Unsubstantiated Buyout Rumors
For a brief moment last Thursday, DIDI stock soared in pre-market trading, fetching as much as $13 per share. This came on reports that DiDi was looking to go private.
It wasn’t just a random social media account either that circulated the rumors. Rather, the Wall Street Journal suggested that a deal could be on the way. The WSJ report speculated that a tender offer would help placate Chinese regulators and clean up the situation with angry foreign shareholders.
However, the company unequivocally shot down this rumor.
In a press release, DiDi stated that it was aware of “a Wall Street Journal article published [Thursday] saying the Company is considering going private. The Company affirms that the above information is not true.” That’s about as direct of a rebuttal as you’re ever going to see.
Now, we don’t know for certain. It’s possible the WSJ report had good sources and DiDi simply isn’t ready to go public with any further information yet.
However, it wouldn’t be surprising if the original report was based on fairly thin information. In any case, DiDi shareholders shouldn’t count on a takeover or buyout to save the day.
DIDI Stock Verdict
If you like taking a gamble, DIDI stock could be a perfect wager. If the regulatory problems with the Chinese government can be resolved, DIDI stock will bounce dramatically.
However, make no mistake. This is an ultra high-risk position. It’s not at all inconceivable that shares could end up ultimately going to zero.
If China never comes to an agreement to let DiDi sign up new people in its app, it is hard to see much of a future for the business. In a scenario where all Chinese American Depository Receipts (ADRs) are delisted, it would likely affect DIDI stock.
All that said, DIDI stock was trading around $15/share just after its IPO. It’s not at all impossible to imagine shares returning to that level if the Chinese government gives the all-clear signal.
There’s a case for buying the correction here. Just be aware that you may need nerves of steel to ride the trade to fruition.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.