A few months ago, Digital World Acquisition Corp (DWAC) announced its merger with Donald Trump’s media company, Trump Media & Technology Group. Not surprisingly, the SPAC quickly popped up and hit a high of around $100 before turning back towards the lows of $40. Investors immediately wanted exposure to Donald Trump with his massive social media following, however, I believe this stock carries too much risk.
In recent news, Reuters reported on January 6 that Trump Media & Technology Group was expected to launch its social media app, Truth Social, on February 21. The social media app feels very similar to Twitter (TWTR), with users being free to post. Do whatever they want except to follow other users and trending topics. The stock has gained about 35% since the news, though I believe there remains a long, volatile road ahead for shareholders.
Yes, it cannot be denied that Trump has massive followers, however, I do believe that shareholders can keep a risky asset in their portfolio. Aside from potential regulatory scrutiny among all social media companies, financial projections appear too aggressive and the stock is already pricing in success.
For now, I believe investors should stay away from the name, though admit that I wouldn’t be surprised to see a decent pop once Truth Social officially launches next month.
Digging Into TMTG and Truth Social
Before digging further into the social media app, Truth Social, the entire organization is built around Trump’s massive social media following and the belief that the company can disrupt traditional social media players. While I agree that there is potential for some disruption, it takes significant scale, investment and time horizon for new social media companies to be successful.
Interestingly, before Donald Trump was banned from Twitter, he posted an impressive 89 million followers to go with his 33 million Facebook followers and 24 million Instagram followers. While this represents a massive following, it is not automatically related to 100% conversion to Trump media and technology.
In total, Donald Trump had about 146 million followers, although it is likely that some of these are the same person (ie, a person can follow him on Twitter, Facebook, and Instagram, which would equal 3 followers). By comparison, Facebook has about 2 billion daily active users (unique individuals) and Twitter has over 200 million average monetizable daily active users. In other words, even if Trump’s 146 million followers were all individuals with no repeatability (which it isn’t) and the company converted 100% of these into monetizable users (unlikely), they were still smaller than Twitter. Will be
Of course, Trump Media & Technology will compete in multiple segments of the market, including news, paid subscription content, podcasts, and a messaging platform. While neither of these services is new to the market by any means, the company’s approach appears to be too broad to garner as much interest as possible.
In the company’s filings, he provided financial projections for the next several years. On a positive note, the company isn’t mentioning a lot of revenue for its Truth Social platform, which is a reasonable assumption given the difficulty of growing users and being able to monetize them.
Over the next 5 years, the company anticipates its total TMTG+ user base to reach 81 million, of whom 26% are monetized users, thus generating revenue of $3.7 billion. While these assumptions are not 100% guaranteed, they do present a blue sky development opportunity.
However, many social media platforms, especially in their infancy, struggle to improve their monetization base, as it would cost millions, if not billions, of dollars to achieve massive, if not billions, of dollars in terms of daily active users. Huh. Interestingly, operating margins or profitability have not been factored in the company’s financial projections. So even if the above assumptions turn out to be true regarding user growth and revenue, this company could still lose billions of dollars.
In a recent survey asking consumers whether they would use a Trump-backed social media platform, only 30% of respondents said yes, while 54% said no. Even looking across political lines, Republican respondents were only 54% likely to use Trump-backed social media platforms, while 27% of their own said no. This further supports the idea that it may be difficult to attract a large user base centered entirely around Donald Trump.
Also, many social media users may not be willing to pay monthly subscription fees for news, podcasts, messaging, etc. In an age where so much information and messaging capabilities have been freed up, it’s hard to imagine that all Trump followers are willing to pay a monthly fee for services.
Over time, investors will certainly see a combination of revenue growth, users, profitability and cash flow. Not only is the company’s ability to expand user engagement in any way necessary.
Even doing a quick Google Trends search, over the past year, search inquiries from Trump Media and Truth Social haven’t changed much. Yes, there was a massive spike when the acquisition was originally announced, but interest in the company has recovered very quickly.
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Another area of concern is how much Trump would earn from the deal. When the acquisition was originally announced, the purchase price was quoted at $875 million. However, this purchase price is only using the $10 introductory SPAC price. According to the company’s filings, there are 40 million additional earning-out shares based on stock achieving certain thresholds, with the highest target being a stock receiving $30/share.
Using the stock’s current price of ~$68, this could result in billions in earnings. In other words, after the acquisition closes, the company could be on the hook for a massive share dilution and payment of earnings related to the initial $875 million purchase price. Yes, the $875 million purchase price combined with the company’s recent $1 billion in PIPE financing is a fine job of building a social media empire, but it took several years of significant capital investment to acquire the industry at large. Requires (not to mention even more time) time to build consistent profitability.
Another area of concern is government regulation on big technology. Given the growing concern over social media players largely monopolizing the market, it seems likely that social media may be closely monitored by regulators for many years to come. TruthSocial is looking to become a more “free marketing” idea of social media, however at a time when the government is cracking down on what is considered free speech on social media, it is hard to imagine that TruthSocial would be under any regulatory authority. Will escape scrutiny.
The chart above shows the relative stock performance of major social media companies compared to DWAC. Given the significant rotation of growth and high-valuation stocks, major social media companies such as FB, SNAP, TWTR and NFLX have all pulled back 15-25% (FB quite flat in the past month). On the other hand, judging by the recent news of Truth Social potentially launching in February, DWAC is actually up over 20%. I believe this significant outperformance is overdone and driven more by sentiment than a change in DWAC fundamentals, thus, a reversal of the mean is likely.
Even though Trump followers can quickly download Truth Social and subscribe to TMTG’s podcasts, news, etc., I don’t believe this will be enough to justify the price in the stock currently.
Management provided very bullish projections for the next several years and until we see more details in future filings, I think investors should be wary of this speculative investment.