DIDI stock fell over 9 percent on Aug. 19 and closed just above its 52-week lows. The stock trades at about half of its IPO price of $14 and is down 60 percent from its peak. It has the dubious distinction of becoming the second-worst Chinese IPO of 2021 behind RLX Technology. What’s the forecast for DIDI stock and should buy or sell this Chinese tech stock amid the continued crackdown in the country?
The 13F filings have revealed that several hedge funds took a stake in the troubled Chinese tech stock during the second quarter. Dan Loeb’s Third Point held 6.15 million DIDI shares at the end of the second quarter. Meanwhile, several others like ARK Invest’s Cathie Wood have sold their holdings in Chinese companies.
Should you buy or sell Chinese tech stocks?
There has been nothing short of a bloodbath in Chinese tech stocks. Names like Alibaba (BABA), JD.com (JD), and Tencent are trading near their 52-week lows and are underperforming U.S. tech stocks. What makes the underperformance more pronounced is that U.S. stocks are actually near their all-time highs while Chinese stocks are plummeting.
As I noted previously, China has taken a hard left turn under the current leadership. The investment thesis in Chinese tech stocks was built around the narrative that the country would continue to reform, which it has been doing gradually over the years. However, the opposite has happened in 2021. This has made Chinese tech stocks a risky proposition.
As an asset class, Chinese tech stocks have become uninvestable for a lot of asset managers amid uncertainty. Simply put, there are a lot of risks that are tough to price at this moment.
Why is China going after DIDI?
Coming back to DIDI stock, China’s crackdown started a few days after the IPO. The investigation was even going on before the listing. The company warned of the impending investigation but investors took that as yet another boilerplate caution. But then, that wasn’t going to be the case and China’s crackdown was severe.
The country is concerned about the massive data that DiDi has for Chinese citizens and worries that it could be shared with foreign governments. SoftBank and Uber are the two top shareholders in the company. While SoftBank is a Japanese company, Uber is a U.S. enterprise. China isn't exactly friends with either of the countries.
China is drafting laws for rider rights.
China is concerned about the rights of drivers associated with DIDI. These concerns aren't unfounded and several jurisdictions globally have been trying for more rights for workers in the gig economy. While in democracies, the company also has a voice and the process goes through judicial scrutiny, the government's writ prevails in China.
The business model for DIDI would start to look shaky if China comes up with harsh guidelines for rider rights. Given the utmost importance that the country is giving to wealth inequality with President Xi Jinping speaking against it, harsh guidelines are a possibility.
DiDi also draws attention for its alleged monopolistic business in China. China has been trying to ensure fair competition in the tech sector. BABA paid a $2.8 billion fine over antitrust allegations in China earlier this year.
Reports suggest that DiDi was asked by Chinese regulators to delay the IPO. However, the company proceeded anyway. Going against the regulators isn't something that Chinese authorities take lightly.
DIDI stock forecast
Given the uncertainty, not many Wall Street analysts have provided a forecast for DIDI stock and even those who have a rating have become cautious. In July, Atlantic Equities downgraded the stock to neutral and assigned a $12 target price.
The target prices for Chinese tech stocks might not display the true picture. The consensus target prices for Chinese tech stocks like BABA and JD would reveal a massive upside potential.
As for DIDI, it isn't possible to comment whether it's too late to sell the stock. While it might continue to be volatile, investors can only hope that ultimately some sanity will prevail in China.