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A Didi Chuxing IPO is on the way, and the company is targeting a $60 billion valuation at launch.
An official date has not yet been announced, but the company expects to go public sometime in the first half of 2021.
You might only be familiar with Uber Technologies Inc. (NASDAQ: UBER) and Lyft Inc. (NASDAQ: LYFT) when it comes to ride-hailing. But Didi is one of the premier ride-hailing firms in the world.
In fact, Didi Chuxing has a total of 550 million users, operating across Asia, Australia, and Latin America. Compare that to Uber's 75 million.
Still, there is something to be said about recent ride-hailing IPO failures. Both Uber and Lyft tanked after their IPOs, sometimes trading as much as 70% below their IPO prices.
But Didi might have something the other companies don't.
Here's whether or not you should buy Didi stock after its IPO.
What's So Great About Didi?
Didi Chuxing is China's top ride-hailing firm. It could also be the top ride-hailing firm in the world after a few years.
The company was founded eight years ago, and it's just begun to see profits in Q2 2021.
Uber has a 17.5% stake in Didi, and Didi made a $1 billion investment in Uber, so you could say Didi is essentially the Chinese Uber. But it's much more than that.
In 2015, Didi merged with a company called Kuaidi to form a smartphone-based transport services giant. Users would hail taxis, privately owned cars, carpool, and catch buses. This is a marked difference from the Uber and Lyft models - beyond cars, they have only scooters.
Didi wanted a U.S. IPO for the prestige of operating alongside big names like Uber and Lyft. There would also be greater capital investment potential. However, the company had to back out due to tension between China and the United States.
In addition, Chinese companies trading on the NYSE are subject to heightened scrutiny and regulation. So, Didi will trade on the Hong Kong exchange.
But even if Didi was restricted to China alone, there would still be a case for the company.
It serves a nation of 2 billion people and has plenty of institutional backing. Tech investment giant and Uber-backer SoftBank Group Corp. (OTCMKTS: SFTBY) backs Didi. Alibaba Group Holding Ltd. (NYSE: BABA) and Tencent Holdings ADR (OTCMKTS: TCEHY) also back the company.
Didi is currently in initial talks with banks about the IPO. In the coming months, it will be confirming which banks will take the lead in the process.
Before its IPO, Didi still expects to have another funding round to boost the valuation. Some of its shares are still trading below its 2017 peak valuation of $56 billion.
Beyond that, there is no "definitive" plan or timeline so far. The company said it would let market conditions dictate how it goes about it.
Didi could not have chosen a more momentous time to go public in Hong Kong, as Ant Group is also preparing a $35 billion listing in both HK and Shanghai - the world's largest.
The Hong Kong exchange has seen $28.8 billion IPOs and secondary listings in the last six months. Didi and Ant group would solidify the exchange as an international market hub.
Should You Buy Didi Stock?
Most IPOs tend to be volatile at the beginning. You get a big wave of early investors buying in on the hype, and then they fade out.
For that reason, a lot of IPOs tend to see a dip in the time following the IPO. We already mentioned Uber and Lyft, but we can name a few more examples of this.
JFrog Ltd. (NASDAQ: FROG) is down 33% since its debut last October, from $72 to $48.
Snowflake Inc. (NYSE: SNOW), the biggest software IPO in history, even saw a 40% drop after climbing 61% in the couple months after.
This is how IPOs tend to go, which is why we always caution against buying into them right away.
There may be cases where you want to get in as soon as possible. But most of the time, it might be good to wait for the hype to die and see if the stock can get closer to a stable, true value.
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You also want to be wary of the company's specific industry.
Citing Uber and Lyft, it is hard to be optimistic about a ride-hailing service. But as we said earlier, there might be something different with Didi.
A big reason Uber and Lyft have had trouble is simply because they both exist. The companies have been steeped in a price war across the United States for the last couple years, and that is what has driven their stock prices down.
What Didi has going for it is that it has China mostly to itself, and it has penetrated international markets.
A userbase seven times that of what most consider the biggest brand in the business (Uber) could mean a great deal to the performance of Didi stock after its IPO.
For this reason, the stock is likely a buy over Uber or Lyft. That said, the success of Didi could also be money in Uber's pocket, since Uber is a stakeholder, which would give Uber even more of a leg-up in its battle with Lyft.
If you want to own Didi stock, though, it's going to take a bit more effort to get ahold of it.
How to Buy Didi Stock
Didi is moving its IPO from the NYSE to HK. That means, once it goes public, buying shares is not as simple as getting on any app and searching for the stock.
Your broker would have to offer the option to trade global stocks - that is, stocks on other exchanges. Only a handful of brokers do this, like Charles Schwab and Fidelity.
Something else to be mindful of is that the exchange rates and potential taxes might be different from buying an ordinary stock. There is a lot of red tape for brokers to go through when you consider different currencies and laws across national lines.
Some brokers might even allow trades on some foreign exchanges and not others. You want to check with them to make sure they can access the specific exchange you want to trade on.
If you want to avoid all those questions, you can simply invest in an ETF that trades on U.S. exchanges.
Certain ETFs might specialize in Chinese stocks like Tencent, Alibaba, and Baidu Inc. (NASDAQ: BIDU). You can watch a few of these ETFs to see if they add Didi after its IPO.
A few examples are iShares MSCI China ETF (NASDAQ: MCHI) and Renaissance Capital's International IPO ETF (NYSEArca: IPOS).
Another way to access Didi without buying it directly is to wait for the American depository receipt (ADR). This is basically a certificate representing shares of a foreign stock. Some companies will put those out to open investment to other countries.
For example, if you have shares of Alibaba from the NYSE, that is an ADR.
With what we know about ride-hailing IPOs, your best bet at getting a stake would be to buy an ETF or wait for an ADR.
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.
