The last few months have been quite eventful for Chinese ride-sharing service Didi Global (NYSE:DIDI). In June, DIDI stock was listed on the New York Stock Exchange. At the height of its first day of trading, it boasted a market capitalization of over $80 billion.
However, DIDI stock plunged after the Chinese government suspended the company’s app from stores, citing cybersecurity risks. With the government on its back and more potential regulatory headwinds on the horizon, DIDI stock is incredibly risky.
According to China Internet Watch, Didi is the “world’s largest mobility technology platform by annual active users.” Between April 1, 2020 and March 31, 2021, the company served roughly 493 million global active users.
Though the company is present in over 15 countries, it derives most of its revenue from its Chinese market. Therefore, the government crackdown on its app is likely to have a far-reaching impact that can seriously affect its business in the long run.
Regulatory Troubles
The warning signs were pretty clear for Didi even before it went public. In April, it was one of 30 internet companies that met with regulators from the Chinese government regarding anti-monopoly rules.
Moreover, Uber (NYSE:UBER) is the one of the largest shareholders of the company. Didi drew the ire of regulators not only with its monopolistic business, but also its foreign ownership and its decision to list on a foreign exchange.
China’s cyberspace regulator ordered app stores to remove Didi’s app. The Cyberspace Administration of China (CAC) found glaring violations in how the company collected and used personal information. Until the company finds a solution to these issues, it cannot accept new customers on its app. Didi stated that it would resolve the problems and work to address the authorities’ concerns.
Negative Outlook Ahead for DIDI Stock
The future of Didi is murky at this point. The CAC has put restrictions on an additional 25 apps that the company operates. The authorities stated that these apps have violated laws concerning the collection of personal data.
In the worst-case scenario, Didi’s products and services could be suspended after the cybersecurity review. At this stage, the market has only priced in the short-term losses from restrictions on new user registrations. However, the review could have a far-reaching impact on Didi’s business operations and result in more downside for the company.
It’s also possible that more regulatory agencies in China will want to review the company’s operations. The cybersecurity review primarily relates to privacy protection, but there are several things other agencies can scrutinize. Some of these include pricing, monopolistic practices and advertisements.
In fact, this is already a reality for some parts of Didi’s business. The State Administration for Market Regulation asked Didi’s bike-sharing businesses to make their pricing rules more transparent last month.
The Bottom Line on DIDI Stock
DIDI stock has had a tough time due to its legal headwinds. It appears that Didi Global’s regulatory risk will continue to weigh on its stock for the foreseeable future.
Before it can recover, the company will need to satisfy the demands of the CAC and other regulatory bodies. Otherwise, its legal troubles will continue to plague Didi’s long-term development plans and significantly impact its current operations. Therefore, it’s best to avoid DIDI stock until it gets past its regulatory woes for good.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.