Fearless Traders Must Understand the Issues Before Going Long on Didi Global

Interestingly enough, most U.S. stock traders probably didn’t think much about Chinese ride-hailing giant Didi Global (NYSE:DIDI) until DIDI stock tanked recently. Both the company and the stock have been in the headlines lately, but not with positive news.

Some dabblers in Chinese stocks have learned the hard way that China’s government can be quite restrictive. For instance, in order to “prevent addiction,” the nation’s regulators are reportedly restricting the number of hours that minors can play video games.

In the U.S., such measures are unheard of. Yet if you’re going to trade DIDI stock, check your greed at the door because China’s government could cause more problems for the company.

On the other hand, the fear of further government regulations might be overstated. If so, then DIDI stock could be a prime bargain – but always stay informed, as knowledge is power in these unpredictable markets.

A Closer Look at DIDI Stock

Just to provide a quick recap, Didi’s initial public offering (IPO) took place on Jun. 30. That day, the stock began trading at $16.65 per share.

This year, it seems that some IPO stocks have gone through an initial pop, followed by a prolonged drop. Without a doubt, it’s frustrating when a stock quickly falls below its IPO price.

That is precisely what happened to DIDI stock. After promptly topping out at around $18, the stock spent the rest of the summer collapsing. Since mid-August, the share price has clung to the $8 area. This sideways, tight-range price action is almost as frustrating as the previous plunge.

At the same time, DiDi’s trailing 12-month earnings per share is -$2.33. That’s problematic when the share price is around $8. Hopefully, the company can move closer to profitability. Its ability to do so will, in part, depend on the Chinese government’s restrictive actions, which are difficult to predict.

A Huge Market Presence

I’ll start out with the good news. Judging by DiDi’s prospectus, the company’s  business is robust. As the world’s largest mobility technology platform, DiDi is active in 17 countries and had 493 million active users during the first quarter.

In Q1, the company also had 15 million annual active drivers, as well as 41 million average daily transactions. That prospectus was dated June 29, so its figures are likely out of date. Still, there’s no denying that DiDi’s brand recognition in China is strong.

Given the company’s vast market presence, it might be tempting to assume that DiDi should be firing on all cylinders. However, let’s not think in terms of American businesses. In China right now, it’s not always easy to ply one’s trade.

A Tough Place to Do Business

In particular, the Chinese government’s cybersecurity investigation into DiDi has been especially troublesome. It was recently revealed that this probe’s avowed purpose was to “effectively” prevent “potential national security risks relating to procurement, data processing and overseas listings.”

On top of that, Chinese authorities supposedly initiated the investigation because Didi had “forced its way” to a U.S. listing. The regulatory pressure has gotten so severe that DiDi’s fintech business, DiDi Finance, shut down its online mutual aid platform, Diandi Shouhu.

It’s a shame, really, as this mutual aid platform had served over 1 million people since its founding in 2018. The general situation in China has become so troublesome that Soros Fund Management’s Chief Investment Officer, Dawn Fitzpatrick, has stated outright, “We are not putting money into China right now.”

The Bottom Line

So I’ve outlined the challenging situation that some Chinese businesses, including DiDi, are facing today. It might be tempting to adopt a “this, too, shall pass” attitude and just load up on dirt-cheap Chinese stocks. Before you do that, though, please take some time to investigate the problems that China-based companies are dealing with.

DIDI stock could certainly double  and return to its IPO price. Just understand that such a resurgence might take months or years, as China’s regulators are putting a stranglehold on the nation’s businesses – and making it tough for investors to generate profits.

On the date of publication, David Moadel 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.