Trump Truth Social is now a public company. Experts warn its billion-dollar valuation is beyond reason

(CNN) — For the first time in nearly 30 years, a portion of Donald Trump’s business empire hit the stock market. Trading got off to a strong start, but the frenzy subsided as the closing bell rang and shares closed well below their highs of the day.

Trump Media & Technology Group, owner of social media platform Truth Social, began its long and overdue journey as a public company on Tuesday by debuting under the symbol “DJT.”

Shares rose 56% to $78 upon opening, and trading was briefly halted due to the volatility. Shares of Trump Media stabilized around $70 before declining. At the closing bell, Trump Media was trading at $57.99, up 16% on the day.

Despite last-minute declines, Wall Street continues to give the Trump media a staggering valuation of nearly $11 billion, a price experts say is not tied to reality.

Shares of Digital World Acquisition Corp., the holding company that became Trump Media on Tuesday morning, are up nearly 200% so far in 2024. This includes a 35% increase this Monday after the close of operations. Shares rose again in early trading Tuesday, the first opportunity for investors to trade securities under the new DJT stock ticker after the merger.

The stock’s skyrocketing rise comes as Trump Media is strapped for cash, running at losses and its flagship product, Truth Social, losing users.

“This is a very unusual situation. Stocks are way off their fundamentals,” says Jay Ritter, a finance professor at the University of Florida’s Warrington College of Business, who has been studying initial public offerings (IPOs) for more than 40 years. Are.

Ritter said the closest parallel would be GameStop, AMC and other stocks like them that soared during Covid-19 as an army of retail traders surged. In his view, Trump Media is probably worth around $2 per share, a far cry from the implied price of $50.

He says, “The underlying business doesn’t seem to be worth very much. There’s no evidence that it’s going to be a big, highly profitable company.” “I am reasonably confident that the stock price will eventually fall to $2 per share and may even fall below that figure if the company spends all the money it received from the merger.”

The skyrocketing valuation is a major achievement for Trump, who has a major stake of 79 million shares.

At Tuesday’s opening price of about $78, that stake is worth about $6 billion, though lockdown restrictions will likely prevent Trump from selling or even borrowing those shares in the short term.

Trump Media generated just $3.4 million in revenue in the first nine months of 2023, according to the filing. The company lost US$49 million in that period.

However, the market values ​​Trump Media at about $13 billion.

For context, Reddit was valued at just $6.4 billion in its public offering (IPO) last week, even though it generated 160 times more revenue than Trump Media. (Reddit projects revenue of $804 million in 2023, while Trump Media has annual revenue of about $5 million.)

“At these levels, it appears to be divorced from its underlying business results,” said Matthew Kennedy, senior IPO strategist at Renaissance Capital. “Over time, valuations tend to decline relative to fundamentals. That means this stock is definitely at risk for another downturn.”

Michael Ohlrogge, associate professor of law at NYU School of Law, told CNN that “there is no way to equate the current stock price to anything that could be called a rational valuation for this company.”

true social is small

Truth Social faces real challenges and is outshining its competitors.

In February, Truth Social had only 494,000 active monthly users on iOS and Android in the United States, according to SimilarWeb data provided to CNN. That’s a tiny fraction of X’s 75 million (formerly Twitter) and Facebook’s 142 million.

According to SimilarWeb, in February Threads had more than 10 times the number of monthly active users than Truth Social.

Not only this, Truth Social is shrinking. According to SimilarWeb data, its monthly active users declined 51% year-on-year in February. The number of unique visitors to the Truth Social website was 648,000, down 20% year over year.

Kennedy described Trump Media as a “meme-SPAC”, referring to both its astronomical valuation and the fact that it was formed through a merger with a special purpose acquisition company, or SPAC.

“Stocks that trade on momentum can decline rapidly,” he said.

Jonathan Massey, a law professor at Yale, told CNN last week that Digital World’s share price is “clearly a bubble.”

Of course, history shows that bubbles can always get inflated further, and it is very difficult to know when they will burst.

That means Trump Media’s stock price could still keep rising, even if those gains aren’t supported by fundamentals. In theory, a rival company or wealthy group could acquire Trump Media even at these price levels, although Ritter said that is highly unlikely.

“We have already seen with other meme stocks that even if they eventually come back to reflect fundamental value, the process can take quite a long time,” said Ohlrogge, the NYU professor. “There is every reason to believe that this stock could remain at highly inflated prices for a long time, given the enthusiasm for it among Trump supporters.”

“Get away from him”

Matthew Tuttle, CEO of Tuttle Capital Management, told CNN that Trump Media is probably not worth anywhere near $13 billion.

“But it doesn’t really matter,” he said.

Tuttle said SPACs have a history of skyrocketing on their first day of trading, and they made options bets that could make money if the stock rises.

“That’s what it is, and because it’s Trump, you have people waiting for this thing to start (Tuesday),” he said.

However, Tuttle advised day traders to exercise extreme caution when trading the Trump media, noting that the implied volatility is “insane.”

“Stay away from it,” said Tuttle, who sold his Digital World shares but still has options that will pay off if the stock rises sharply. “Normally, I wouldn’t touch it with a 10-foot pole. But I’m not playing with a lot of money and I’ve already made a lot of it. If I wake up tomorrow and it’s trading at $1 If it is, then it’s fine.”

Beyond valuation issues, there are other risks in the Trump media.

For example, the future of this company is inextricably linked to one person: Trump.

“There’s only one major individual at risk, because Donald Trump is the president, the largest shareholder and the most popular user. He’s an individual, and he’s 77 years old,” Kennedy said.

Not only this, but Trump is facing serious litigation in several cases simultaneously.

Trump Media noted the risks in a filing with the Securities and Exchange Commission (SEC): “Donald J. Trump is the subject of multiple legal proceedings, the scope and scale of which is unprecedented for a former President of the United States and current candidate. . An adverse outcome in one or more of the ongoing legal proceedings involving President Trump could have a negative impact on TMTG and its Truth Social platform.”

Trump’s bankruptcy history

Not only does Trump himself face reputation problems, but his companies have a history of bankruptcy.

Trump’s last company to go public in 1995, Trump Hotels & Casino Resorts, used the same symbol DJT. It went bankrupt in 2004 and was delisted from the New York Stock Exchange.

The Trump media also highlighted Trump’s bankruptcy history as a risk in its SEC filings.

“Many companies associated with President Trump have filed for bankruptcy. There is no guarantee that TMTG will not also file for bankruptcy,” the company said.

Another question is what will happen when lockdown restrictions imposed by Trump and other key officials no longer go into effect in the coming months.

Trump’s legal troubles could cause him to sell his major stake, an outcome that would threaten Trump Media’s stock price.

Bet on Trump’s victory in November

Other insiders, including the SPAC sponsor, may also sell.

Like any social media company, Truth Social faces pressure to grow its user base, expand its advertising business, and build a subscription service.

Those tasks are complicated by a polarized political backdrop, in which at least part of the country views the Trump movement with suspicion.

Kennedy said that in many ways, Trump Media’s IPO is a “multibillion-dollar bet” for Trump on a second term, a return to the White House that could be attractive to his social media networks.

Kennedy said, “If he wins in November, Truth Social will probably be the primary presidential media outlet.” “That’s the condition.”

NYU professor Ohlrogge agrees that the election could be a real turning point for this company.

“If Trump were to lose the 2024 election, I think the stock price would drop very precipitously,” he said. “If she wins, she could potentially last a long time, maybe a very long time.”