AMTD Digital (HKD -9.85%) not too long ago grew to become one of many market’s hottest meme shares after its IPO on July 15. The Hong Kong-based fintech firm priced its ADR shares at $7.80, and its inventory began buying and selling at $22.44 earlier than skyrocketing to an all-time excessive of $2,555.30 on Aug. 2.

That abrupt rally was pushed by intense buzz on Reddit’s WallStreetBets (WSB) subreddit in addition to different social media platforms. The inventory has pulled again to $1,100 as of this writing, but it surely’s nonetheless valued at about $200 billion — or 8,000 instances the $25 million in income it generated in 2021.

Picture supply: Getty Pictures.

That absurd price-to-sales ratio signifies AMTD Digital’s features aren’t sustainable, however some buyers may nonetheless be tempted to chase this wild rally. Let’s dig deeper into AMTD’s enterprise, why it all of a sudden grew to become a meme inventory, and whether or not or not its inventory may soar larger earlier than burning out.

What does AMTD Digital do?

AMTD Digital is a subsidiary of the Hong Kong-based funding group AMTD IDEA Group (AMTD 8.84%). AMTD IDEA nonetheless held an 88.7% stake in AMTD Digital after its market debut, which makes it a serious beneficiary of the corporate’s large post-IPO rally.

AMTD operates 4 fundamental companies. Its Digital Monetary Companies phase primarily gives digital insurance coverage and banking providers by third-party companions. Its SpiderNet Ecosystem Options phase generates membership charges by connecting entrepreneurs, corporations, enterprise companions, and buyers to one another by an expert community.

AMTD’s Digital Media, Content material, and Advertising and marketing phase develops varied digital films, podcasts, webinars, and dwell movies for content material suppliers. Lastly, its Digital Investments enterprise homes a portfolio of investments in different corporations, that are tethered to its SpiderNet ecosystem.

How briskly is AMTD Digital rising?

In 2021, AMTD’s income rose 17% to $195.Eight million HKD ($25.2 million), and its internet revenue elevated 8% to $171.6 million HKD ($22.1 million). These numbers are first rate, however they can not probably assist a market cap of greater than $200 billion. If it had been buying and selling at a extra cheap two to 4 instances gross sales, it could really be value lower than $100 million.

This complete scenario is much more ridiculous when you think about that AMTD IDEA, which nonetheless owns many of the firm, is simply value $12 billion. AMTD IDEA’s shares have greater than tripled within the first three days of August, however its decrease market cap means that AMTD Digital’s valuations are unsustainable. 

Why did AMTD Digital develop into a meme inventory?

AMTD Digital’s rally appears irrational, and lots of merchants on WSB are calling it a “pump and dump” scheme. The precise purpose for that rally stays a thriller, however its low float is likely to be an element.

AMTD Digital solely provided 19 million of its 185 million excellent shares in its IPO. That low float makes its inventory extra weak to wild value swings, and the meme inventory buzz has doubtless amplified that volatility. AMTD additionally granted its underwriters a “greenshoe choice” to accumulate 2.four million further shares at its IPO value of $7.80 inside its first 30 days. This setup raises some troubling issues about potential market manipulation, which might clearly profit AMTD’s insiders and underwriters.

On Aug. 2, AMTD Digital issued a press release to clear the air concerning the “vital volatility” in its inventory value. The corporate stated that to its data, there have been “no materials circumstances, occasions, nor different issues” which might influence its enterprise and that it was “monitoring the market carefully for any uncommon buying and selling actions or abnormalities.”

However, AMTD’s inventory has already been halted a number of instances, and its excessive every day value swings of a number of hundred {dollars} make it a really harmful play. AMTD Digital may nonetheless climb just a little larger because it attracts extra speculative merchants, but it surely may simply plummet again to the only digits as soon as the retail buzz wears off — so I consider it is too late to purchase this meme inventory.