This is not the right market in which to speculate on an impossible-to-value stock with no earnings, scant revenue, uncertain prospects and buyers solely focused on the company’s celebrity appeal. Yet people foolishly are buying one stock with these features: Digital World Acquisition Corp. (DWAC) , the special purpose acquisition company (SPAC) that is acquiring Trump Media & Technology Group. They are buying the stock, which is trading at an absurd valuation, at precisely the wrong time.
A few weeks ago, Trump Media unveiled its Twitter clone, Truth Social, which was followed by a moment of excitement as the app raced to No. 1 in downloads. The initial enthusiasm quickly ran its course; now the app’s ranking has plummeted, with the media outlet seeing barely any usage. This bodes poorly for the success of Truth Social and anyone invested in Digital World Acquisition.
Former President Trump’s prior post-presidential effort, “From the Desk of Donald Trump,” received minimal readership and shut down after 29 days. The status of his appeal is clearly in question.
Since the deal to acquire Trump Media was announced last October, Digital World Acquisition has been highly volatile. Part of the enthusiasm stems from the limited number of shares outstanding before the deal closes, which has helped the stock trade at a frothy premium valuation. Once the deal is consummated, more than five times the current shares will be free to trade, taking the market cap from $3.4 billion to more than $17 billion. Compare that steep valuation to Twitter (TWTR) , with a $26 billion market cap and more than $5 billion in revenues.
Even worse, investors in a PIPE (private investment in public equity) have agreed to buy $1 billion in DWAC shares, free to sell immediately when the deal closes. Buyers get to purchase shares at $33.60 or lower if DWAC trades below $56. The PIPE deal hands these preferred investors a minimum of a 40% discount to the market price with no lock-up agreement. This ought to give pause to any buyer of free-trading stock.
An ongoing Securities and Exchange Commission investigation, announced in December, is probing possible violations in connection with consummating the deal as well as the trading of the stock. Like any deal that hasn’t officially closed, a risk remains that the SEC may uncover an issue that delays or alters the closing process.
The current market environment is especially bad for speculating in an unproven company at an unjustifiable valuation, with no revenue, that attempts to compete with established companies. Plus, investors have rightly shunned SPAC deals in general due to frothy valuations, high cash burn rates and overly optimistic assumptions. Add to the mix that Trump Media’s management team has an unproven track record with a product off to a shaky start.
Once the deal closes, a significant amount of shares will be free to sell with a cost basis far below the current price. Investors are buying into nothing more than hope and celebrity appeal – a bad combo as overvaluation and froth are mercilessly rooted out in this market. The stock will likely face significant losses in the coming months.