Didi vs. Uber: Why the Valuation Gap?

A Resurgence of Competition: Didi's IPO and Valuation

Previously, a costly competition unfolded between Uber, the leading U.S. ride-hailing service, and its Chinese counterpart, Didi, within the Chinese market. Following a financially demanding period, Uber divested its Chinese operations to Didi, redirecting its focus to alternative regions.

However, these two entities are now poised for renewed competition as Didi prepares for a public listing in the United States. This impending IPO is of significant interest to the SoftBank Vision Fund, Tencent, and Uber, due to their existing equity in Didi stemming from the prior business deal.

The Valuation Discrepancy

Interestingly, Didi is projected to be valued at a lower rate than Uber, by a considerable margin – several tens of billions of dollars. The reasons behind this valuation difference remain unclear.

This week, Didi announced its intention to offer shares at a price range of $13 to $14 each for its IPO. Each share traded on U.S. markets represents one-fourth of a Class A share within the company. Alternatively, each American Depositary Receipt (ADR) equates to 25% of a Class A ordinary share in Didi.

With 288 million shares available in its U.S. IPO, Didi anticipates raising up to $4.03 billion, representing a substantial capital influx.

Analyzing Didi's Potential Worth

Based on a $13 to $14 per ADR price, Didi’s valuation falls between $62.3 billion and $67.1 billion, utilizing a nondiluted share count. Considering potential future share issuance due to vested options, the company’s value could reach as high as $70 billion. Renaissance Capital estimates a midpoint valuation of $67.5 billion when employing a fully diluted share count.

Despite these figures, Didi is not expected to surpass Uber’s current valuation. As of today, Yahoo Finance assesses Uber’s market capitalization at $95.2 billion.

Exploring the Reasons for Lower Valuation

The question remains: why is the Chinese company valued less than its former competitor? A detailed examination of their financial data is necessary to understand this disparity.

Key factors influencing the valuation will be closely scrutinized by investors.

• Revenue growth
• Profitability
• Market share

Didi and Uber: A Comparative Analysis

Uber reported adjusted revenues of $3.5 billion for the first quarter of 2021, representing an 8% increase year-over-year. During the same period, Uber’s adjusted EBITDA stood at -$359 million.

Conversely, Didi achieved RMB42.163 billion in revenue during Q1 2021, equivalent to approximately $6.52 billion based on current exchange rates – though the company itself calculates this figure at $6.4 billion utilizing a slightly different rate. Notably, Didi recorded a net income of $835.6 million for the quarter, significantly exceeding Uber’s performance, which has yet to achieve adjusted profitability in recent reporting periods.

Didi’s growth rate in the first quarter surpassed that of Uber, with its top line expanding by over 100% compared to the pandemic-affected Q1 2020. It’s important to remember that the initial impact of COVID-19 was felt in China before spreading globally, leading to widespread lockdowns. Consequently, a substantial decline in performance during the first three months of 2020 for a Chinese transit company was anticipated.

Despite its larger size and greater profitability, Didi’s valuation appears lower than Uber’s, particularly considering its current IPO price range. This discrepancy may be attributed to differing levels of international exposure. Uber boasts a more globally diversified presence, with only 2% of Didi’s revenue originating from international sources.

Furthermore, Didi’s business is heavily focused on mobility within China, whereas Uber’s ride-hailing operations are more centered on its domestic market. Uber’s substantial and rapidly expanding delivery business offers investors potential for significant future growth.

In contrast, Didi characterized its “Other Initiatives” segment in the first quarter of 2021 as follows:

While Didi does engage in food delivery services, these are currently incorporated into its international revenue figures, indicating a relatively early stage of development.

Therefore, Uber demonstrates greater diversification across both geographic regions and revenue streams. Didi, while larger and more profitable, exhibits a higher degree of concentration. This difference in approach could partially explain the valuation gap, as diversification can be a valuable asset.

Considering the Q1 2021 run rates, the following revenue multiples apply:

• Uber: 6.8x Q1 2021 run rate (calculated using adjusted revenue to account for unique factors in the U.K. market).
• Didi: 2.7x Q1 2021 run rate (based on the highest valuation figure deemed reliable).

This difference is substantial; Uber’s revenue is valued at more than double that of Didi’s on a per-dollar basis.

This situation prompts several key questions:

• Do investors hold a more optimistic outlook for global growth compared to the potential within the Chinese market?
• Is there heightened concern regarding competition within the Chinese mobility sector compared to Uber’s broader global markets?
• Are Chinese companies currently trading at a discount relative to their U.S. counterparts due to anxieties surrounding increasing governmental influence in China?

Additional inquiries may arise, but the pricing of the Didi deal remains somewhat puzzling. The comparatively low valuation warrants further investigation, and more clarity may emerge upon final pricing.