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Is Didi’s IPO a stock loser from the start?

Chinese ride-hailing company expects to make about $4 billion in proceeds, but some question the company’s valuation

Chinese ride-hailing company Didi has filed for an IPO on the New York Stock Exchange, but some analysts are already questioning the long-term value of the stock. (Photo: Didi)

Didi Global operates in 16 countries, but 90% of its revenues come from China. In 2020, the ride-hailing giant saw its business plummet due to lockdowns related to COVID-19 and lost $1.6 billion on $21.6 billion in revenue, a 10% decline from 2019. The loss might have been bigger, save for the company’s decision to expand its operations into intracity freight delivery, food delivery and community group-buying services.

Even as a Chinese government investigation into the company is ongoing, Didi is moving ahead with an initial public offering (IPO) on the New York Stock Exchange that would value the company at roughly $60 billion.

Didi filed formal paperwork with the Securities and Exchange Commission (SEC) for the IPO on Thursday. The company expects to sell roughly 288 million shares in a range of $13 to $14 per share. In the SEC paperwork, Didi said it expects to receive approximately $4 billion from the stock sale. It will trade under the ticker Didi and could be listed as early as next week.

Didi said it had 493 million active users in Q1 2021 and 15 million active drivers. In the SEC filing, Didi said it had 5.2 million bikes, 2 million electric bikes and 1 million-plus electric vehicles operating in China, accounting for 38% of all electric miles driven in the country last year.

Didi’s closest U.S. comparison is Uber (NYSE: UBER), which has a market cap of approximately $95 billion. Uber shares were trading at $51.28 in midmorning trading Friday. Lyft (NASDAQ: LYFT) has a market cap of approximately $20.3 billion. Shares in Lyft were down slightly to $61.62 per share midmorning.

“We aspire to become a truly global technology company. We are very fortunate to have been founded in China in this new era. Benefiting from China’s technological and economic development and the country’s innovative urban development, we have accumulated advanced experiences and practices, which we believe will allow us to help even more people live a better life,” founders Cheng Wei and Jean Liu wrote in a founders’ letter filed with the IPO paperwork. “We also believe that these experiences and practices can be applied more broadly outside of China. For example, we know that people across Latin America also care deeply about safety; that Russians are also looking for more convenient mobility choices; and that drivers in South Africa share a desire to partner with a platform that respects them and helps them earn more.”

Wei owns 7% of the company’s shares and holds 15.4% of its voting power, according to documents.

Uber stands to gain from the IPO, with the U.S.-based ride-hailing giant holding a 12.8% stake in Didi. Softbank (OTCPK:SFTBY) is the largest shareholder, with a 21.5% stake and Tencent also holds a significant stake at 6.8%.

Didi has raised $23.2 billion, according to Crunchbase, across 24 funding rounds since its founding in 2012 by Wei and Liu. The company employs more than 13 million drivers, it said in the filing.

China investigation

Last week, Reuters reported China regulators were investigating Didi for antitrust violations. The investigation comes as China is cracking down on tech companies in the country, including Alibaba and Tencent.

According to the Reuters report, the country’s State Administration for Market Regulation is reviewing whether Didi has engaged in any practices that forced smaller rivals from the market and also whether its pricing mechanism is transparent enough.

In SEC filings, Didi said it had been asked to evaluate its business and correct any violations, but it warned that regulators may not be satisfied with the changes.

A loser stock?

In March, Didi was reported to be seeking a $100 billion public offering, and despite turning a profit of $837 million in Q1 2021, that valuation doesn’t seem to be materializing, even as its business begins to return to more normal levels. Several analysts have questioned the value of the stock, with David Trainer, founder and CEO of investment research firm New Constructs, writing in a Forbes opinion piece that Didi is a $34 billion company at best.

“Despite holding an estimated 90% of the ride-sharing market in China, Didi’s business model is just as unprofitable as Uber (UBER) and Lyft (LYFT),” he wrote.

Trainer noted that Uber and Lyft “have shown investors that ride sharing is not a profitable business because of intense competition, low margins and a lack of differentiation between services.” In addition, he expressed concerns about what actions Chinese regulators may take and the fact that Didi is not profitable despite owning 90% of the Chinese market.

“Losses accelerated in 2020 during the COVID-19 pandemic. Revenue grew 5% compounded annually from 2018-2020 while core earnings fell from -$1.7 billion in 2018 to -$1.9 billion in 2020. The company’s return on invested capital (ROIC) remains negative and has fallen from -12.4% in 2018 to -12.6% TTM,” he wrote.

For comparison, Uber went public in 2019 with an offering of 180 million shares at $45 per share, valuing the company at $75 billion. Lyft went public at $72 per share in 2019.

A Seeking Alpha IPO analysis, published on June 17, when rumors of a $100 billion valuation were still rampant, noted growth potential for Didi but also questioned the valuation.

“The company is still having significant losses with a further deteriorating margin. Its rumored IPO valuation of $100 billion would imply a much richer multiple than the peer, Lyft, which we find difficult to justify,” the report said.

The Seeking Alpha report noted concerns about Didi’s profit margin continuing to deteriorate.

“Its adjusted EBITA margin has dropped to -13% in Q1 ’21 from the pre-pandemic level of -2% in 2019. Although the margin for China Mobility has improved over the same period of time (from 3% to 9%), the deterioration in the other segments’ margin, especially in Other Initiatives, has outweighed the improvement,” it said.

The report concluded that “without improving its profitability, it’s only a matter of time the company will need capital injection again.”

Click for more Modern Shipper articles by Brian Straight.

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Brian Straight

Brian Straight leads FreightWaves' Modern Shipper brand as Managing Editor. A journalism graduate of the University of Rhode Island, he has covered everything from a presidential election, to professional sports and Little League baseball, and for more than 10 years has covered trucking and logistics. Before joining FreightWaves, he was previously responsible for the editorial quality and production of Fleet Owner magazine and Brian lives in Connecticut with his wife and two kids and spends his time coaching his son’s baseball team, golfing with his daughter, and pursuing his never-ending quest to become a professional bowler. You can reach him at [email protected].