AMTD Digital Becomes Unexpected Meme Stock. And Surprise – It’s Already Crashing

The company’s shares soared as much as 21,426% in the weeks after its IPO last month, making it Wall Street’s newest meme stock

Key Takeaways:

• Shares in digital financial services incubator AMTD Digital spiked to as high as $1,679 following their July 15 trading debut from an IPO price of $7.80
• The dramatic surge is reminiscent of last year’s saga involving GameStop, whose stock skyrocketed, fueled by retail investors looking to punish short sellers

By Warren Yang

Shares of newly listed financial services incubator AMTD Digital Inc. (HKD.US) have gone viral to become the latest meme stock since their trading debut last month, delivering huge profits for early investors who are probably still trying to figure out what happened. No one so far has been able to explain what fueled the stock’s meteoric rise.

But what goes up must come down, as the saying goes. That’s already begun to happen, including a 48% crash on Tuesday. It doesn’t take much brains to predict more theatrics to come, since even at its latest close the stock still trades at 27 times its IPO price.

The wild surge is reminiscent of the saga of GameStop Corp. (GME.US), the struggling game shop operator whose shares embarked on a similar spectacular rise last year. In that instance, the huge rally was the work of small-time retail investors from a Reddit community called WallStreetBets who harbored grand plans to inflict big losses on short sellers who bet against GameStop.

AMTD Digital, a Hong Kong-based company that calls itself “Asia’s one-stop comprehensive digital solutions platform,” went public in New York last month with a July 15 trading debut. The stock’s price more than tripled from its modest IPO price of $7.80 in its first two days of trading, which was impressive enough. But that pales in comparison to what happened in the following weeks.

The stock rallied relentlessly to hit $180 on July 28, which marked its busiest day, with more than 2.4 million shares traded. By the close of trading last Tuesday, it had reached a nose-bleed level of $1,679, giving AMTD Digital a market capitalization of more than $310 billion – similar to the value of giants like Samsung Electronics (005930.KS) and Chevron (CVX.US).

The same day, AMTD Digital issued a note thanking investors for “the successful completion” of its IPO, without directly mentioning the extraordinary pop in its share price. But it was obvious the company felt compelled to address the surge, which it did indirectly by saying there wasn’t anything unusual going on with its business.

In what seems like a massive understatement, AMTD Digital did note that its stock is undergoing an “initial stabilization period” as its IPO underwriters, second-tier players Maxim Group and Livermore Holdings, have a so-called green-shoe option to purchase an additional 2.4 million shares in the company at the IPO price within 30 days of the date of its final prospectus.

Given the stock’s huge surge, the two investment banks most likely thanked their lucky stars and exercised this option as soon as they could. Such a move would have been a win-win for both the underwriters and AMTD Digital. The banks could have another opportunity to buy AMTD Digital shares at a massive discount to their market value, while AMTD Digital could raise more capital through the sale of additional shares.

Following the meteoric early gains, AMTD Digital stock already seems to be fizzling out, coming down steadily since last Tuesday’s peak on notably lower trading volume. But even after the Tuesday sell-off, it still has a way to go to reach a level that makes sense, considering that its latest price translates to a price-to-earnings (P/E) ratio of more than 2,300. 

Meme stocks

Last year’s GameStop craze gave birth to the term “meme stocks,” which refers to stocks that are hyped up on social media sites and other online communities, often with little or no regard for fundamentals of the companies being hyped. Other companies that gained similar followings include theater operator AMC Entertainment Holdings (AMC.US), which nearly went bankrupt after its business tanked during the pandemic, and fallen smartphone superstar BlackBerry (BB.TO).

Predictably, these meme stocks have all fallen back, though not necessarily to levels where they were before their dramatic rises started.

While AMTD Digital’s case bears many similarities to last year’s meme stocks, it is even more mysterious in some ways. Some media reports attributed its surge to traders on WallStreetBets who bid up GameStop last year. But members of that group appeared as just as puzzled as anyone. “I feel like all of us knew about this stock only when it was too late,” one wrote.

Adding to the mystery, shares of another Hong Kong company, invest bank Magic Empire Global Ltd. (MEGL.US), soared some 2,300% on their first trading day after their New York IPO last Friday.

While AMTD Digital has made headlines as a new meme stock, few seem to know what exactly the company does.

Created in 2019, AMTD Digital is ultimately controlled by AMTD Group, which was founded by Hong Kong billionaire Li Ka-shing’s CK Hutchinson Group (0001.HK) and Commonwealth Bank of Australia (CBA.AX) in 2003. But after its surge, Li Ka-shing, one of Asia’s richest men, moved to distance himself from the company, according to media reports.

The company’s main source of revenue is its “SpiderNet” ecosystem, through which it provides capital, technologies and other resources for a network of digital financial startups, and also connects them with other businesses that can help them develop. AMTD Digital receives fees from members of this community, and makes its own equity investment in ventures it considers promising.

In addition to nurturing young business, AMTD Digital operates its own insurance brokerage business in Hong Kong, which it complemented with the acquisition of a similar venture in Singapore named PolicyPal in 2020. The company also has started investing in digital media and marketing businesses.

AMTD Digital’s revenue growth has been lackluster, especially compared to its share-price performance. In the 12 months through April 2020, its second year of operation, the company’s revenue surged more than tenfold year-on-year to HK$168 million ($21.4 million). But the pace slowed sharply to 17% in the next fiscal year, and to less than 4% in the 10 months through February this year from the same period in 2021.

Perhaps, the company’s biggest attraction is its high profit margin, which exceeded 60% in its latest fiscal year, excluding valuation gains and other extra income.

But none of this probably mattered to the mysterious armies of traders who pushed up AMTD Digital’s stock. At the end of the day, a meme is just a façade, and in this case nobody really seemed to care what lay behind that facade. But a precipitous drop in this particular meme is inevitable. The big question is where the price will end up when the dust settles.

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