AMTD Digital Inc. (HKD, Financial), headquartered in Hong Kong, is at the forefront of digital transformation in Asia. The company provides innovative digital platforms and services across various sectors, from finance and media to content, marketing and investment. Its operations can be categorized into four distinct business segments: digital solutions services—financial services, digital solutions services—non-financial services, hotel operations, hospitality and VIP services, digital media, content and marketing services and others. Established in 2019 under the umbrella of the AMTD IDEA Group, the company has swiftly capitalized on its technological prowess to meet the diverse needs of its clientele across the vast Asian market.
Recent performance and growth
AMTD Digital Inc has achieved strong revenue growth in recent years, increasing from $25.3 million in FY2021 to $33.1 million in FY2023. The growth was driven by expanding its digital non-financial services business and new revenue streams from hospitality and digital media services following acquisitions.
The company's largest business is its digital non-financial services segment, contributing 84.8% of total revenue so far this year. This segment provides advisory, investor relations and public relations services to clients. Revenue grew 18% year over year to $28 million, driven by new contracts and expanded services for existing clients. With high profit margins of 77%, this segment displays substantial operating leverage as revenue scales with minimal incremental costs.
The smaller digital financial services segment generates steady commission income from insurance brokerage services. However, profitability is lower than other units due to the commission-based model. Expanding digital financial offerings could drive upside for this segment. In 2023, AMTD Digital expanded into new business areas through acquisitions.
The newly acquired hospitality services segment contributed $2.2 million in revenue, but was loss-making with a $1.8 million segment loss. As an early-stage integration, losses are understandable. With AMTD's expertise in digital services, there is potential to improve operations and profitability in this segment through technology enhancements.
The newer digital media services segment generated $1.3 million in revenue, providing diversification from reliance on service revenue. With AMTD Digital's digital focus, this segment offers synergistic potential to cross-sell services and drive recurring revenue streams.
Profit growth masks core operations decline
Upon initial examination, it is easy for investors to be impressed by AMTD Digital's steady rise in profits over the years. From 2020 to 2023, the company's net profit surged from $19.5 million to $40.1 million. However, a closer analysis reveals this growth in profitability primarily stems from gains made through the sale of investments rather than from its core operations. In fact, the company's operating income decreased from about $18.6 million in 2020 to $14.6 million in 2023. The operating cash flow also dropped from $27.6 million to $15.5 million in the same period.
While rising investment gains boosted overall profitability, the decline in core operating performance is concerning. For sustainable growth, AMTD Digital needs to demonstrate consistent improvement across its core digital services segments. Reliance on investment sales for profits could be risky if market conditions become unfavorable.
Valuation concerns
AMTD IDEA Group, the parent company of AMTD Digital, finds itself in an unusual situation. With a market capitalization of only $218.9 million, it holds an 85.6% stake in AMTD Digital, which is valued at $908 million. This divergence between AMTD IDEA Group's valuation and the implied valuation of its majority holding suggests one side is significantly mispriced.
Despite AMTD Digital's promising outlook and progress, investors should be cautious at the current elevated valuations. With a price of $5.50 per share, the company has a staggering market capitalization of $1.05 trillion. Valuation metrics indicate potentially overstretched levels, with AMTD Digital trading at nearly 32 times sales and 24.55 times earnings. Compared to peers like Everbridge Inc. (EVBG, Financial), Olo Inc. (OLO, Financial) and Couchbase Inc (BASE, Financial), AMTD Digital's sales multiple is more than 10 times higher.
The company's chairman, Dr. Timothy Tong, projects 50% earnings growth year over year, from $41.7 million in 2023 to $62.55 million in 2024. Assuming a desired earnings yield target of 10%, this would imply a market cap of $625 million, or a share price of $3.27, 40.5% below the current level.
Further, AMTD Digital has only provided estimated earnings growth, without providing projections for revenue, operating income or cash flow. This raises the possibility that the forecasted rise in net profit could again stem largely from non-operating income, such as gains from asset sales, rather than from core operations. The lack of transparency around top-line metrics makes it difficult to judge if the impressive bottom-line growth is sustainable through core business performance. More details on projected operating and cash flow growth would allow for a more informed analysis of the earnings outlook. As it stands, the earnings projection alone provides an incomplete picture, as it is unclear how much operational expansion truly underpins the strong guidance.
Share price volatility due to low float
AMTD Digital's share structure makes the stock prone to extreme volatility. Of the total 191.2 million shares outstanding, only 27.32 million or 14.2% constitute the public float that is freely traded. The remaining majority of shares are consolidated in the hands of institutions and insiders.
This low percentage of float means the share price can swing sharply on low trading volumes. When major shareholders decide to buy or sell large blocks, it can rapidly push the price up or down without much resistance. At the same time, sudden sentiment shifts among the small pool of retail investors who hold the float can also have an exaggerated effect.
The result of this structure is that AMTD Digital experiences rollercoaster price moves. In July 2022, shares traded above $16. Within a month, the price had skyrocketed to a staggering peak of $2,555 before rapidly plunging back down to around $5.50. This extreme volatility highlights how the stock's low float enables huge price swings from relatively small actions.
Going forward, closely monitoring trading volumes and ownership changes will remain critical. Any indicators of large holders buying or selling shares could foreshadow imminent spikes or collapses.
Key takeaway
AMTD Digital displays promising growth prospects in digital services, but its current valuations appear extremely stretched. The company trades at a substantial premium to peers, and fair value estimates based on projected earnings and revenue point to a market capitalization of only $500 million to $600 million compared to the current valuation of over $1 billion.
Moreover, the company's concentrated ownership and low float fuel considerable share price volatility. Given these concerns around steep valuation and volatility, prospective investors should be cautious and wait for a better entry point. Absent a significant correction, AMTD Digital's risk-reward profile appears skewed to the downside. Interested investors should closely track valuation, core operating metrics and ownership changes rather than get caught up in momentum and hype.
