Stocks to sell

In a matter of weeks, DiDi Global (NYSE:DIDI) stock has gone from a hot IPO to an undeniable disaster. Soon after its debut on the U.S. stock market at an initial price of $14 per share, the China-based ride-hailing company was hit hard by the  Chinese government’s decision to investigate and penalize it.

The shares have rebounded in the past two days, largely due to a rumor that Didi would look to take itself private. The company denied the report.

Source: Piotr Swat / Shutterstock.com

Didi’s position with Beijing keeps getting worse, and the shares are hovering around $10. As more updates come out, expect DIDI stock to fall further.

Some may think that the shares are worth buying at this point, considering the relatively cheap levels that China’s answer to Uber Technologies (NYSE:UBER) and Lyft (NASDAQ:LYFT) has reached.

But there’s little reason to buy the shares. Even if Beijing ends up dealing less of a blow than expected to Didi,  its shares don’t offer much value at today’s prices.  The shares will  have to drop meaningfully below today’s levels before reaching an attractive entry point.

With DiDi still in China’s regulatory crosshairs, the best move for investors is to simply stay away from the stock at all costs. That’s because, despite the stock’s nosedive, its decline may still have a long way to go.

The “Unprecedented Penalties” Against DiDi

It’s clear that the fallout for DiDi is going to be worse than first thought. Recent news reports state that it faces “unprecedented penalties” from Chinese regulators. As a result, its fines could top the $2.8 billion that Alibaba (NYSE:BABA) had to pay for its transgressions, and some of DiDi’s operations may get  suspended. Even worse, it may be forced to delist its U.S.-listed shares.

Already, the investigation by the Cyberspace Administration of China has resulted in DiDi’s app no longer being available for download. On the surface, this crackdown may be about the company’s alleged “national data security risks.” But the consensus in Western media is that China’s moves against DiDi are part of an overall crackdown on U.S.-listed Chinese stocks by Beijing.

Since DiDi’s saga began, the shares of other Chinese-based, U.S.-listed companies, like EV maker Nio (NYSE:NIO) have been negatively affected by the news. Only time will tell whether an overall crackdown makes U.S.-listed China stocks a “no man’s land” when it comes to investing. But for now, consider DIDI stock to be uninvestable.

Until we learn more about DiDi’s “unprecedented penalty,” it’s tough to anticipate what lies ahead for the firm. Yet even for those who think that the company will survive this crisis, now is hardly the time to buy its shares because there are other issues to keep in mind when evaluating the name.

In the Best Scenario, Wait for a Pullback

Regulatory risk is the biggest issue for the stock today. But there are other concerns still at play as well. Even if Didi survives its encounter with Chinese regulators intact, DIDI stock remains overvalued at its current price levels.

As a Forbes.com columnist noted shortly before the IPO, other factors indicated that DiDi Global deserved a lower valuation. First, the chances of it being anywhere as successful outside of China as it was in the Asian nation are low. Secondly,  despite its near-monopoly in its home market, it was still not profitable there. Consequently,  the columnist thought that the company  was worth $34 billion, about half of its $68 billion valuation when it started trading at $14 per share.

A number of Seeking Alpha pundits came to a similar conclusion. DIDI stock was overpriced at $14 per share and was at best worth around $7-$8 per share, they stated. Of course, that’s before any talk of “unprecedented penalties” changed the conversation.

If the risk of DiDi being delisted disappears, it may be worth buying the stock  below $5 per share. But until that scenario unfolds, DIDI stock is far from being any sort of “contrarian buy.”

The Bottom Line

Thanks to a still-hot market for IPOs, DiDi Global managed to debut at a valuation that may have been far above its actual value. But any worries about this has taken a backseat to the current China crackdown.

Even so, concerns about the stock’s valuation should still come into play. Still fully priced,  DiDi will only become worth buying if it falls well below $5 per share. But Didi will only be appealing if the threat of it being delisted in the U.S.  is completely off the table.

However, until we learn more about DiDi’s pending “unprecedented penalties,”  everyone should stay away from the name.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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