DIDI Can Bring Quick Profit for Risk-tolerant Traders

DiDi Worldwide (DIDI) is a well-known taxi company in China. Basically, it is the Chinese equivalent of the American Uber Technologies, Inc. (UBER). Still, DiDi is struggling with problems that Uber doesn’t have right now.

In particular, Didi is being targeted by Chinese regulators amid wider crackdown on cybersecurity.

Some people might even say that DiDi has become the face of troubled US-listed Chinese stocks. This idea may be valid, but investors should keep their cool and consider the possibilities here.

If you’re serious about “buying when blood runs in the streets”, then you could be staring at an excellent opportunity with DIDI stocks. It’s a real test for contrarians – and recommended only for the most risk-tolerant among us. (To see Didi stock charts on TipRanks)

A quick look at DIDI stock

DIDI stock has not been around that long as it just had its IPO on June 30. The stock started trading that day at $16.65 a share and stayed close to the $15 area for a few days after its public debut.

Unfortunately for the people holding their stocks, the price action got nasty after that. On July 12, DIDI’s share was barely over $11.

When checking in on July 28, the share price had fallen all the way to $8.04. It just goes to show that chasing stocks during their IPO hype phase is not necessarily a profitable strategy.

Meanwhile, DiDi’s trailing 12-month earnings per share is -$2.31. That’s not a positive sign if the stock is trading around $8.

No doubt investors will want to see that EPS figure positive. But now that DIDI stocks are at a lower price, there may be a bargain here — but first it’s essential to understand why the stock slumped in the first place.

A giant under pressure

It’s really no exaggeration to call DiDi a giant in the Chinese ride-hailing market. It’s like Uber, but bigger.

However, regulators in China seem to think DiDi poses a cybersecurity threat. For example, China’s Cyberspace Administration has reportedly ordered the country’s mobile app stores to remove Didi’s main app from their offerings.

That, of course, is a major blow to DiDi’s business. The silver lining is that apparently users who had already downloaded Didi’s apps were not affected by the regulator’s order.

Prior to this action, the Cyberspace Administration of China launched a cybersecurity assessment of DiDi. In addition, the regulator has reportedly banned DiDi from accepting new users in China.

In a post on social media, DiDi assured that the company guarantees the security of personal data. Of course, this was not enough to reassure shareholders, and the DIDI share faltered.

Taking it in Stride

Fast forward to July 26. On that day, investors learned that Chinese companies listed on US stock exchanges will be required by the SEC to disclose the risks posed by the Chinese government meddling in their companies. So says Allison Lee, a top official at the U.S. Securities and Exchange Commission.

And so the restrained war between the US and China continues. Market traders sold DIDI stocks when they learned of this requirement, but then the stock price quickly recovered to break even for the day.

This is important because it shows how investors can adapt and even take unfavorable news to heart. Yes, US-listed Chinese companies will now have to disclose certain risks, but it seems unlikely that many market traders will act differently as a result.

This situation is reminiscent of the labels on junk food. People know about the high fat and cholesterol levels, but they continue to eat what they like.

Similarly, quite frankly, the risk disclosure requirement is unlikely to have much impact on DiDi investments. In addition, the rapid intra-day recovery in DIDI stocks shows that the worst may be over, as the bad news for DiDi seems already priced in.

Wall Street weighs in

According to TipRanks analyst consensus, DIDI is a Hold, based on a rating of 1 Hold. The average Didi price target is $12, implying upside potential of 49.25%.

The takeaway

There is no denying that tensions between China and the US remain and could continue for some time to come.

However, these tensions may already be reflected in the DIDI share price.

Consequently, daring investors can see a trading opportunity here. Please don’t load the boat on DIDI stock as governments and regulators could exert more pressure.

Disclosure: At the time of publication, David Moadel had no position in any of the securities mentioned in this article.

Disclaimer: The information in this document is for informational purposes only. Nothing in this section should be construed as a solicitation to buy or sell securities.