AMTD Digital (HKD -0.31%) recently became one of the market's hottest meme stocks after its IPO on July 15. The Hong Kong-based fintech company priced its ADR shares at $7.80, and its stock started trading at $22.44 before skyrocketing to an all-time high of $2,555.30 on Aug. 2.
That abrupt rally was driven by intense buzz on Reddit's WallStreetBets (WSB) subreddit as well as other social media platforms. The stock has pulled back to $1,100 as of this writing, but it's still valued at about $200 billion -- or 8,000 times the $25 million in revenue it generated in 2021.
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That absurd price-to-sales ratio indicates AMTD Digital's gains aren't sustainable, but some investors might still be tempted to chase this wild rally. Let's dig deeper into AMTD's business, why it suddenly became a meme stock, and whether or not its stock could soar higher before burning out.
What does AMTD Digital do?
AMTD Digital is a subsidiary of the Hong Kong-based investment group AMTD IDEA Group (AMTD 0.58%). AMTD IDEA still held an 88.7% stake in AMTD Digital after its market debut, which makes it a major beneficiary of the company's massive post-IPO rally.
AMTD operates four main businesses. Its Digital Financial Services segment mainly 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 to each other through a professional network.
AMTD's Digital Media, Content, and Marketing segment develops various digital movies, podcasts, webinars, and live videos for content providers. Lastly, its Digital Investments business houses a portfolio of investments in other companies, which are tethered to its SpiderNet ecosystem.
How fast is AMTD Digital growing?
In 2021, AMTD's revenue rose 17% to $195.8 million HKD ($25.2 million), and its net profit increased 8% to $171.6 million HKD ($22.1 million). Those numbers are decent, but they can't possibly support a market cap of more than $200 billion. If it were trading at a more reasonable two to four times sales, it would actually be worth less than $100 million.
This entire 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 have more than tripled in the first three days of August, but its lower market cap suggests that AMTD Digital's valuations are unsustainable.
Why did AMTD Digital become a meme stock?
AMTD Digital's rally seems irrational, and many traders on WSB are calling it a "pump and dump" scheme. The actual reason for that rally remains a mystery, but its low float might be a factor.
AMTD Digital only offered 19 million of its 185 million outstanding shares in its IPO. That low float makes its stock more vulnerable to wild price swings, and the meme stock buzz has likely amplified that volatility. AMTD also granted its underwriters a "greenshoe option" to acquire 2.4 million additional shares at its IPO price of $7.80 within its first 30 days. This setup raises some troubling concerns about potential market manipulation, which would clearly benefit AMTD's insiders and underwriters.
On Aug. 2, AMTD Digital issued a statement to clear the air regarding the "significant volatility" in its stock price. The company said that to its knowledge, there were "no material circumstances, events, nor other matters" which would impact its business and that it was "monitoring the market closely for any unusual trading activities or abnormalities."
Nevertheless, AMTD's stock has already been halted multiple times, and its extreme daily price swings of several hundred dollars make it a very dangerous play. AMTD Digital might still climb a little higher as it attracts more speculative traders, but it could easily plummet back to the single digits once the retail buzz wears off -- so I believe it's far too late to buy this meme stock.
