Investment Thesis
I believe that Trump Media & Technology Group Corp. (NASDAQ:DJT) is in a precarious financial position because of their heavy cash burning and a valuation that appears significantly inflated when assessed through conventional investment metrics. I believe that this situation signals an overvaluation that cannot be justified by traditional financial analysis such as price-to-earnings ratios, revenue growth, or operational efficiency. The company's continual erosion of financial reserves without a corresponding increase in business value or market position leads me to support a "hold" on the stock.
DJT's situation is complicated by their high short interest in their stock — 84.61% short float, which indicates a market consensus betting heavily on the stock's decline. It may also set the stage for potential volatility and can lead to a short squeeze if there's a sudden upward price movement.
This brings me to the recent activity surrounding GameStop (GME), which emerged from a period of relative quiet to a sudden price surge, and may resemble the potential trajectory of DJT. It’s the same meme stock behavior during a short squeeze that the latter could follow following a bullish catalyst, allowing the company to issue additional equity at elevated prices. I believe this is a financial lifeline that the company needs at this moment.
I also believe that the outcome of Trump's trial in Manhattan could determine the future of DJT because I believe this could be the bullish catalyst. I believe a not-guilty verdict could spark a rally among his supporters that are investors and potentially trigger a short squeeze causing a spike in DJT's stock price. The potential for a short squeeze, in my point of view, will not resolve the underlying issues of cash burn and operational inefficiency of the troubled company but it could allow them to issue more stock, fundamentally changing the balance sheet and providing more capital to bolster business plans. I believe this would make the stock asymmetric. Therefore, for now, I value this company as a hold.
Background
Digital World Acquisition Corp. (DWAC), a special purpose acquisition company (SPAC), was launched to merge with another company to take it public. Under this setup, businesses can avoid the traditional initial public offering (IPO) process. DJT, founded by Andy Litinsky and Wes Moss in 2021 and the parent company of alt-tech social media platform TRUTH Social, emerged as DWAC's target for the merger. Former president Donald Trump owns most of the stock of the social media platform company.
In October 2021, DJT and DWAC announced their plan to merge. However, the merger faced many delays due to federal investigations and heavy regulatory scrutiny. These delays continued throughout 2022 and into 2023.
In early 2024, DWAC and DJT moved closer towards finalizing the merger. The U.S. Securities and Exchange Commission (SEC) declared the merger's registration statement effective in February 2024. This allowed DWAC to proceed with their plans to take DJT public under the new name and stock symbol "DJT," reflecting Donald Trump's initials. The two companies finally merged in March of this year.
DWAC shareholders voted on the merger, and once it was approved, DWAC announced that DJT would become a wholly-owned subsidiary. Trump's significant stake in DJT was valued at around $3 billion based on DWAC's current stock price at that time. DWAC's stock value surged significantly after the merger approval.
Post-merger, DJT faced operational and financial challenges. Despite projections of substantial user growth on TRUTH Social, the actual subscriber activity and monetization performed below expectations. In 2023, DJT reported only modest revenues and large operating losses.
Analysts have observed that both DWAC and DJT stocks behave like meme stocks, which are marked by price fluctuations due to market sentiments and Donald Trump's popularity.
Trump’s Hush Money Trial
Donald Trump’s current trial centers around the alleged payments (“hush money”) made during the 2016 presidential elections to suppress information that was thought to have the potential to harm his campaign.
Trump’s trial looks into the legality and ethical implications of the financial transactions and agreements made with concerned people to keep them from disclosing information all within the context of campaign finance laws. Prosecutors allege Trump of three payments made on his behalf to suppress claims of marital infidelity where one case involves Trump's then-lawyer and fixer, Michael Cohen, who arranged to pay actress Stormy Daniels.
Paying hush money is not inherently illegal, but how these payments were made has led to allegations that they were made to influence the election outcome by preventing damaging stories from surfacing. In 2018, Michael Cohen admitted to these violations.
Despite the ongoing legal challenges, including the hush money trial, Trump's business ventures, particularly DJT, have been resilient since. In particular, the company’s merger with DWAC and the debut of the DJT ticker resulted in a surge in stock value, without being affected by Trump's legal troubles.
Amidst the trial, Trump faces a gag order from the New York court due to his public comments against the judge overseeing his case. It was initially imposed in March to protect the integrity of the trial by preventing the former president from making public statements that could threaten or influence participants, including jurors, witnesses, prosecutors, and court staff. The courts concluded that restricting his public communications was imperative to keep disruptions and ensure the safety and impartiality of the trial process.
Yesterday, the New York State appeals court upheld the gag order, and claimed that it did not violate Trump's First Amendment rights. They believe that Trump's public communications posed a threat to the trial's integrity and fairness. Trump has been fined twice, totaling $10,000, for violating the gag order. He was also warned that continued violations could lead to more severe consequences, such as serving jail time.
I believe that if Trump were to be found guilty there is a risk that he could be ordered to stop posting on Truth Social. Convicted felons can be deprived of a cell phone in jail or prison. Since there are felony charges I think this is a risk here.
I believe that Trump himself is the biggest value proposition to Truth Social. People make accounts (and use the platform) to in part see what he thinks. He is the 45th president of the United States. He could be the 47th as well. His opinions matter. If he is in jail and cannot post to Truth Social, what will be the new main value proposition of the platform?
Truth Social Financials
Truth Social reported revenue of $4.1 million in 2023, up from $1.5 million in 2022. Despite this growth, the revenue remains low, considering the market cap of DJT. The company also disclosed their operational and financial challenges with a substantial net loss of $58.2 million in 2023.
Trump Media's stock settled closer to $48.66 in early April following the disclosure of the loss after debuting on Nasdaq with a high of $79. This is typical of any meme stock that exhibits roller-coaster behavior.
As I stated above, much of the influence on the stock stems from Trump’s activities. Any justification of TRUTH Social's current valuation depends heavily on Donald Trump's personal brand and his influence. His use of the platform during high-profile events like his trial has been a key strategy to maintain user engagement and attention.
In March, when he posted a $91.6 million bond to cover the defamation verdict, TRUTH Social’s total daily active users reached 148,000. However, this strategy has not translated into increased user numbers or substantial revenue growth, since user engagement has largely flatlined. In March 2024, they had 21% fewer active users.
Since I am a hold for now I am not going to try to estimate the fair value of Truth Social. The stock is likely overvalued on most financial metrics. If the bull case plays out below I will be inclined to consider upgrading the stock and working to develop what I believe to be a fair value for the stock.
The Bull Case: He is Innocent and There is A Short Squeeze
In the case that Trump is proven not guilty and there is a short squeeze, the short interest percentage of float for DJT stands at a notably high 84.61%, which indicates a proportion of the company's floating shares are currently held in short positions. With a short interest ratio of 1.44 days to cover, it would take approximately 1.44 trading days to cover all short positions if every trade were to buy back these shares .
If there is a potential short squeeze, such a high short interest suggests a situation similar to that seen with GameStop and other meme stocks, where a sudden influx of buying pressure could force short sellers to cover their positions. This will then drive the stock price even higher. If realized, it will offer DJT the chance to issue additional equity at inflated prices, similar to what GameStop did during their own short squeeze. Another meme stock (AMC) did this same thing this week, raising $250 million. I believe it will provide the financial buffer needed by the company.
The Bear Case: Trump Is Found Guilty
If Donald Trump is found guilty in his New York trial, the conviction would hinge on the 34 counts of falsifying business records in the first degree, with each potentially punishable by up to four years in prison. However, the actual sentence would depend on the judge's discretion, Trump's legal defense, and any mitigating or aggravating circ*mstances presented during the ongoing trial.
The conviction could cause volatility and affect the stocks associated with his businesses, including DJT. If the market perceives the conviction as destabilizing for his businesses, there could be a negative impact on the stock price. I think that DJT might face operational challenges, which could adversely affect investor confidence.
I believe Trump could face strict limitations on his access to communication tools, including social media since prisons typically do not allow inmates access to phones or electronic devices that can connect to the internet. This would mean Trump could not engage in his usual prolific use of social media, especially on TRUTH Social, where he has been highly active. This would sever his direct line of communication with his base and the broader public and therefore affect his influence and support.
His absence could also put the platform's declining user base into more complexities. Without Trump's frequent posts and interactions, user engagement could fall further since his presence is highly influential among active users who stay on the platform.
Conclusion
I believe that the future of DJT hinges on the outcome of Donald Trump's ongoing trial. The company's valuation heavily reflects the influence of Trump's personal brand rather than DJT’s operational performance or revenue growth. This positions the stock as a speculative bet on the future legal and public standing of Trump himself instead of the traditional financial metrics that I use.
A not-guilty verdict might bolster Trump's public image, and will likely lead to a rally in DJT's stock. I suspect an increased investor confidence and speculative buying to happen right away, which could lead to a short squeeze. If materialized, DJT has an opportunity to raise capital through equity offerings at inflated prices, similar to GameStop’s tactic during their meme stock surge.
However, my commentary is not focused on the political dimensions surrounding Trump or the trial. Instead, I wrote this analysis aimed at covering the reasons behind DJT's high valuation in light of weak revenue fundamentals. The stock's current price is highly influenced by speculations in the market and the potential for volatility made by Trump's legal outcomes rather than by any grounded financial or operational factors.
Investors considering a position in DJT need to recognize the high-risk/high-reward nature of this potential short squeeze. There is the potential for short-term gains, especially if the trial results in favor of Trump. However, I am concerned about the disconnect between the company's valuation and their financial health. This is why long-term viability and growth, in my opinion, will require more than just favorable legal outcomes. It’s obvious that a renewed business strategy and improvement in financial performance are what the company needs.
I urge investors to approach DJT with caution and maintain a clear distinction between the short-lived allure of speculative gains versus the realities of the company's financial health. Therefore, I believe DJT is a hold.
Noah's Arc Capital Management
This account is managed by Noah's Arc Capital Management. Our goal is provide Wall Street level insights to main street investors. Our research focus is mainly on 20th century stocks (old economy) undergoing a 21st century transformation, but occasionally we'll write on companies that help transform 20th century firms as well. We look for innovations in a business model that will cause a stock to change dramatically. Associated with SA contributors Thomas Potter and Elijah Buell.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Noah Cox (account author) is the managing partner of Noah’s Arc Capital Management. His views in this article are not necessarily reflective of the firms. Nothing contained in this note is intended as investment advice. It is solely for informational purposes. Invest at your own risk.
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