Assessing Didi’s (Didi) Post-IPO Valuation

Shares of Didi Global (DIDI) surged almost 30% on Wednesday, the inaugural day of trading on public markets for the Chinese ride-hailing company. The stock closed Wednesday at $14.20, slightly above the $14 per share it was priced for.  

Questions about the company’s valuation, and for that matter, the valuation of other newly-minted public companies via SPACs, have sparked debate about the rationality being applied to these so-called unicorns. The company priced 316.8 million American Depository Shares, each representing one Class-A common stock at $14 per share Wednesday, totaling $4.4 billion. With the stock currently trading at $14.32, this values Didi at around $70 billion.

The stock soared as soon as trading began, reaching a high of $18 or valuation of near $77 billion, thanks to the more-than-expected demand. But while there are indeed concerns about “rational buying,” it says a lot that the stock closed almost 20% off the highs, suggesting that perhaps, “rational selling” was also applied. The question is whether the current valuation is justified? Time will tell. But for now, there are several metrics that suggest that shares of Didi, the so-called Uber (UBER) of China, may yet rise over time.

The “Uber of China” is referred to by that name, not just because it is also a ride-hailing company. Didi in 2016 bought Uber’s Chinese arm, which makes Uber a major pre-IPO shareholder, owing 12% of the company. Other pre-IPO backers include Chinese tech giant Tencent (TCEHY) and Softbank Vision Fund. The level of confidence demonstrated from its large backers has to do with the fact that the company controls an estimated 90% ride-hailing market share in China. What’s more, Didi gets some 90% of its total revenues from its China Mobility segment — a segment that includes chauffeurs, ride-sharing, taxis and hitch services.

However, despite this strong competitive position, the market is concerned. As with both Uber and Lyft (LYFT), Didi’s losses were more magnified due to the pandemic. Although revenue rose 5% (compounded annually) from 2018 to 2020, its profits have taken a massive hit, falling to a loss of $1.9 billion in 2020. That’s down from a loss of $1.7 billion in 2018. Meanwhile, the company's return on invested capital has shown no meaningful signs of improvement, declining from -12.4% in 2018 to -12.6% in the trailing twelve months.

As bad as these metrics appear, this also means the company has tons of growth opportunities, especially factoring its 90% market share in the world’s most-populous country. The company estimates its total addressable market to be $6.7 trillion, accounted for 8% of global GDP in 2020. This addressable market has an appealing quality to patient investors. Why? This means, when factoring its $22 billon revenue for 2020 during Covid, the company has only reached 1% of its total addressable market. 

If the company can continue to grow its bookings (the amount of dollar value riders spends before deductions), the revenue will continue to rise, and it can quickly turn its losses to profits. The question is, howe quickly can it execute that direction? In other words, Didi might someday become highly profitable, while maintaining its long-term growth rate. What it needs today, after one day of trading, is not a valuation assessment. It needs time.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

UBER

Other Topics

IPOs Markets Technology Investing