The astonishing rally of VinFast Auto shares came to a sudden and sharp halt, resulting in a loss of $83 billion in market value. The electric car maker, which was trading profitlessly and with thin volumes, experienced a 44% tumble in New York, marking the end of a remarkable six-day winning streak. Prior to this downturn, VinFast shares had surged an incredible 688% since its debut in a Special Purpose Acquisition Company (SPAC) listing on August 15.
The meteoric rise and subsequent fall of VinFast shares draws parallels to past instances, such as that of AMTD Digital Inc., which skyrocketed more than 32,000% within a few weeks before experiencing a drastic crash. While there are differences between the two cases, both companies with low free floats and a draw for momentum-chasing retail investors have been susceptible to extreme volatility.
Valuation and Vulnerability
VinFast, despite the market correction, still retains a market capitalization of nearly $107 billion, making it larger than well-established companies like BlackRock Inc. and FedEx Corp. This high valuation is questionable, given that the automaker sold only 24,000 cars globally in 2022, with a net loss of nearly $600 million in the first quarter of the current year. The company’s financials do not seem to justify such an astronomical valuation based on fundamentals alone.
VinFast’s small free float of less than 1% makes it difficult to short the stock, which has contributed to its extreme price swings. However, the risk of such thinly traded stocks is evident, as the market upheaval of VinFast and similar cases underscores.
Caution in Thinly Traded Stocks
The sudden fluctuations and losses experienced by VinFast and other similar cases have led to calls for caution in thinly traded stocks. Such stocks can be highly susceptible to volatile price movements driven by retail investors’ momentum-chasing behavior. Regulatory bodies and exchanges, including the Nasdaq, have expressed concerns and have increased scrutiny of initial public offerings by small-cap companies to address these issues.
The wild ride of VinFast serves as a reminder of the inherent risks and potential pitfalls in investing in such stocks. The case underscores the importance of considering fundamentals, valuation, and the broader market context before making investment decisions, particularly in the context of companies with limited trading volumes and high valuations based on speculative sentiment.