DIDI stock is risky until the dust settles on its regulatory issues

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The last few months have been quite hectic for the Chinese carpooling service Didi Global (NYSE:HAVE I GOT). In June, the DIDI share was listed on New York Stock Exchange. At the height of its first day of trading, it had a market cap of over $ 80 billion.

Source: zhu difeng / Shutterstock.com

However, DIDI shares plunged after the Chinese government suspended the company’s app from the 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 in terms of annual active users”. Between April 1, 2020 and March 31, 2021, the company served approximately 493 million active users worldwide.

Although the company has a presence in more than 15 countries, it derives most of its revenue from its Chinese market. Therefore, the government crackdown on its implementation is likely to have a far-reaching impact that can seriously affect its long-term activities.

Regulatory issues

The warning signs were pretty clear to Didi even before it was made public. In April, it was one of 30 internet companies that met with Chinese government regulators about anti-monopoly rules.

In addition, Uber (NYSE:UBER) is one of the major shareholders of the company. Didi has drawn the ire of regulators not only with its monopoly activity, but also its foreign ownership and decision to list on a foreign exchange.

China’s cyberspace regulator has ordered app stores to remove Didi’s app. The Cyberspace Administration of China (CAC) has found flagrant violations in the way the company collects and uses personal information. Until the company has found a solution to these problems, it will not be able to accept new customers on its application. Didi said he would resolve the issues and work to address authorities’ concerns.

Negative outlook for DIDI Stock

Didi’s future is cloudy at this point. The CAC has placed restrictions on 25 additional apps the company operates. Authorities said the apps violated laws regarding the collection of personal data.

In the worst-case scenario, Didi’s products and services could be put on hold after the cybersecurity review. At this point, the market has only considered short-term losses resulting from restrictions on new user registrations. However, the review could have a significant impact on Didi’s business operations and cause further inconvenience to the company.

It’s also possible that more regulatory agencies in China may want to review the company’s operations. The cybersecurity review is primarily about privacy, but there are several things other agencies can look into. Some of them include prices, monopoly practices, and advertisements.

In fact, this is already a reality for parts of Didi’s business. The State Administration for Market Regulation asked Didi’s bike-sharing companies to make their pricing rules more transparent last month.

The result on DIDI’s stock

The DIDI share has experienced a difficult period 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 business will need to meet the requirements of the CAC and other regulatory bodies. Otherwise, its legal issues will continue to weigh on Didi’s long-term development plans and will have a significant impact on its current operations. Therefore, it is best to avoid DIDI shares until they have definitely overcome their regulatory problems.

As of the publication date, Muslim Farooque does not have (directly or indirectly) any position on any of the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Muslim Farooque is a passionate investor and an optimist at heart. A long-time player and passionate about technology, he has a particular affinity for analyzing technology stocks. Muslim holds a Bachelor of Science in Applied Accounting from Oxford Brookes University.


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