The mystery of a “meme company” raised its valuation from $1 billion to more than $400 billion

Have you heard the name AMTD Digital and who is behind it? Most likely not! But it’s the latest mysterious “meme company” to take its valuation from $1 billion to over $400 billion in just a matter of days.

What is this company?

That’s the question many investors are asking after an obscure Hong Kong company on Tuesday managed to join the ranks of global mega-companies with a valuation of around half a trillion dollars.

It all started when American Depositary Shares (ADS) ticker HKD surged at the open, jumping 25% above its previous close in early trade before hitting an intraday high of $2,555.

At its peak, the share value more than tripled to a market capitalization of more than $450 billion, more than Facebook’s parent company Meta or Chinese online retail giant Alibaba.

And it did so on daily volume of just 350,500 shares, according to Yahoo Finance data, the lowest since the depositary receipt began trading and far below the average of 1.2 million traded per day.

Even after shedding a quarter of its value on Wednesday, the company is still valued at about $240 billion, making it more valuable than Toyota, Nike, McDonald’s or Walt Disney.

Needless to say, it was an impressive performance for a company that sold 16 million shares at $7.80 each in mid-July, giving it a market capitalization of about $1 billion.

What’s behind the jump?

There doesn’t seem to be any justification for this kind of market cap. The total amount of income-generating assets on its balance sheet barely crossed the $400 million mark as of March, according to SEC filings, which is a pittance in the world of high finance. Fortune tried to contact the company, but emails and calls to it went unanswered.

A glance at AMTD Digital’s website reveals a bit of its business model. A short one-minute corporate pitch video touts the company as “Asia’s one-stop digital solutions platform and a fusion reactor for the best entrepreneurs and ideas in the digital age,” using distinctly Star Wars-like rhetoric.

A closer look at the prospectus filed with the SEC reveals what that means. AMTD Digital basically sells a kind of club membership to its “SpiderNet Ecosystems Solutions” which it claims brings benefits by connecting businesses to each other. That made up the bulk of its $25 million in annual revenue generated in the fiscal year that ended in April 2021.

Rather, its abnormal pre-tax earnings for the past three years have been consistently above the top line thanks to fair value accounting gains on its economic interests in companies such as Appier, DayDayCook, WeDoctor and five Asian fintech companies.

The parent company is AMTD Group, a Hong Kong conglomerate that lists investment banking, hospitality, premium education and media and entertainment as its core competencies. It also has another subsidiary, AMTD IDEA, which is also listed on the New York Stock Exchange, but is worth “only” $14 billion.

“Significant Volatility”

Exactly why AMTD Digital is listed in the US is unclear, as it immediately warned investors in its stock prospectus that it could eventually be forced to delist under SEC rules. That’s because red tape introduced by Beijing currently prevents its Chinese auditor from being inspected by the US Public Company Accounting Oversight Board, created under the Sarbanes-Oxley Act.

This has been a constant source of frustration for investors in many Chinese stocks. If the U.S. and China fail to reach a deal, approximately 261 U.S.-listed Chinese companies with a combined market value of $1.3 trillion would face delisting.

AMTD Group chairman and CEO Calvin Choi has left his post as managing director at UBS to take over.

Seismic anomaly

In the world of fundamental analysis, where companies are valued based on their future cash flows, AMTD Digital’s mind-boggling market cap is the kind of seismic anomaly in the financial system that, statistically speaking, should only occur once every hundred years.

Even AMTD Digital doesn’t seem to understand why it’s so valuable now. Using a thank you letter to its new shareholders, the company said it was also confused by the performance of its shares.

“During the period following our initial public offering, the Company has experienced significant volatility in the price of the ADSs and has also seen very active trading volume,” AMTD Digital wrote on Tuesday. “To our knowledge, there have been no material circumstances, events or other matters relating to the business and operating activities of our company after the IPO date.”

With that kind of jump, it’s no surprise that the eternal bears have emerged from their slumber. Noted short seller Jim Chanos asked if “we’re all just going to ignore the 400 billion memes in the room.”

Coincidentally, the rally in the company’s stock came the same day that Securities and Exchange Commission Chairman Gary Gensler praised the 20th anniversary of the Sarbanes-Oxley Act, designed to restore confidence in US capital markets after the accounting fraud scandals that rocked the investors in Enron and WorldCom.

The rise brought back painful memories of Robinhood’s ill-fated decision to remove the ability for retail investors to place buy orders at the GameStop retail chain, seen as a protection decision by a handful of hedge funds.

*The material is analytical in nature and is not advice to buy or sell shares in the financial markets

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