By any standard AMTD Digital Inc. is one of the most overvalued stocks in the world.
The barely profitable Hong Kong-based financial services firm trades at more than 400 times its most recent fiscal year’s earnings, compared with about 6 times Goldman Sachs Group Inc, according to data compiled by Bloomberg. Even after falling more than 90% from its peak in early August, AMTD Digital’s 2,221% gain since listing in New York five weeks ago rivals GameStop Corp’s surge. at the height of meme share mania.
One analyst called AMTD Digital — whose leader is appealing a ban on Hong Kong’s securities industry — “the mother of all shorts.”
However, ask professional short sellers about the stock and they will likely tell you that it is an incredibly risky stock to bet against. AMTD’s tiny free float and low turnover make the stock too expensive for short sellers to borrow, while its extreme volatility can wipe out bearish positions in an instant.
“As a professional short seller, you want to stay away from that,” Soren Andal, whose Blue Orca Capital is best known for betting against companies based in China and Hong Kong, said in an interview. “It’s so extremely volatile that it’s really dangerous.”
That reticence helps explain why AMTD Digital—little known even in Hong Kong financial circles until its staggering profits—is still valued at more than $30 billion, making it more than about half the companies in the S&P 500 index.
As stocks like GameStop and Bed Bath & Beyond Inc. rise again, AMTD Digital offers a stark reminder that seemingly irrational gains can last much longer than seems justified. That’s partly because shorting stocks is very risky, a lesson learned by hedge funds including Melvin Capital Management with losing bets on stocks including GameStop.
AMTD Digital is raising eyebrows on Wall Street after a mysterious rally that topped 32,000% at its peak. At one point, the company was worth about $400 billion on paper, more than companies such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. Other upstarts from Hong Kong or mainland China have also posted similarly inexplicable gains, attracting the attention of US regulators. .
AMTD Digital did not respond to multiple requests for comment. In an Aug. 2 statement titled “Thanking Investors,” it said it was monitoring the market for any trading abnormalities and was not aware of any “material circumstances, events or other matters” that could affect the share price.
Market watchers polled by Bloomberg were baffled by the move. According to data collected by Bloomberg, Tellimer Ltd. became the first and only brokerage to initiate coverage on the company, assigning it a sell rating on Monday in a report titled “AMTD Digital: The Mother of All Shorts”.
While the gains at AMC and GameStop were fueled by a concerted effort by retail investors to squeeze out short sellers, Tellimer analyst Nirgunan Tiruchelvam said AMTD “seems to be a very curious case.”
According to Markit, AMTD Digital’s short interest as a percentage of shares outstanding is less than 0.1%. One big deterrent for bears is the prohibitively high cost of borrowing stocks to sell them short. AMTD Digital’s IPO prospectus lists revenue from customer contracts of just $21.5 million and revenue of $23.9 million for the ten months ended in February.
As of Monday, investors had to pay an annualized interest rate of 900%, according to Blue Orca’s Aandahl. This compares to about 1% for large-cap companies.
Only about 10% of AMTD’s shares are available for trading, limiting the pool for investors and making the stock vulnerable to sharp swings.
“There are much easier things to cut,” Andal said.
© 2022 Bloomberg
