Digital AMTD (HKD -9.85%) recently became one of the hottest meme stocks on the market after its July 15 IPO. The Hong Kong-based fintech company priced its ADR shares at $7.80, and its stock started trading at $22.44 before surging to an all-time high of 2,555, $30 on August 1. 2.
This steep rally was fueled by intense buzz on Reddit’s WallStreetBets (WSB) subreddit as well as other social media platforms. The stock has returned to $1,100 at the time of this writing, but is still valued at around $200 billion, or 8,000 times the $25 million in revenue it generated in 2021.
This absurd price-to-sales ratio indicates that AMDD Digital’s gains are not sustainable, but some investors may still be tempted to continue this wild rally. Let’s dig deeper into AMTD’s business, why it suddenly became a meme stock, and whether or not its stock might skyrocket before it runs out.
What does AMTD Digital do?
AMTD Digital is a subsidiary of the Hong Kong-based investment group AMTD IDEA Group (AMTD 8.84%). AMTD IDEA still held an 88.7% stake in AMTD Digital after its market debut, making it a major beneficiary of the company’s massive post-IPO rally.
AMTD operates four main businesses. Its Digital Financial Services segment primarily provides digital insurance and banking services through third-party partners. Its SpiderNet Ecosystem Solutions segment generates membership fees by connecting entrepreneurs, companies, business partners and investors through a professional network.
AMTD’s Digital Media, Content and Marketing segment develops various digital films, podcasts, webinars and live videos for content providers. Finally, its Digital Investments business houses a portfolio of investments in other companies, which are tied to its SpiderNet ecosystem.
How fast is AMTD Digital growing?
In 2021, AMTD’s revenue increased 17% to HK$195.8 million ($25.2 million) and its net profit increased 8% to HK$171.6 million ($22 .1 million dollars). These numbers are correct, but they cannot support a market capitalization of more than $200 billion. If it traded at a more reasonable price of two to four times sales, it would actually be worth less than $100 million.
This whole situation is even more ridiculous when you consider that AMTD IDEA, which still owns most of the company, is only worth $12 billion. AMTD IDEA’s shares more than tripled in the first three days of August, but its lower market capitalization suggests AMTD Digital’s valuations are unsustainable.
Why did AMTD Digital become a meme store?
AMD Digital’s rally seems irrational, and many traders on WSB are calling it a “pump and dump” system. The actual reason for this rally remains a mystery, but its weak float could be a factor.
AMTD Digital only offered 19 million of its 185 million shares outstanding when it went public. This low float makes its stock more vulnerable to wild price swings, and the stock buzz itself has likely amplified that volatility. AMTD also granted its underwriters a “green shoe option” to acquire an additional 2.4 million shares at its IPO price of $7.80 within the first 30 days. This setup raises troubling concerns about potential market manipulation, which would clearly benefit AMTD insiders and underwriters.
On August 2, AMTD Digital issued a statement to clarify the situation regarding “significant volatility” in its stock price. The company said that to its knowledge there were “no significant circumstances, events or other matters” that would impact its business and that it was “closely monitoring the market for any unusual trading activity or anomalies”. .
Nevertheless, AMDD’s stock has already been halted several times and its extreme daily price swings of hundreds of dollars make it a very dangerous game. AMTD Digital could still climb a little higher as it attracts more speculative traders, but it could easily fall back into the single digits once the retail buzz wears off – so I think it’s far too late to buy this meme stock.
Leo Sun has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.