Digital World (DWAC) stock was a success but DJT is risky

Digital World (DWAC) stock price had a nice run, pushing its total market cap to more than $6 billion. It has jumped by more than 277% from its lowest point in 2023, making it one of the best-performing companies in Wall Street.

DWAC will cease from existing this week as the SPAC concludes its merger with Trump Media, the parent company of Truth Social. The new ticker symbol will be DJT, Trump’s acronym.

DWAC stock chart

Digital World has taken a longer period before completing its merger with Trump’s media company for several reasons. 

The company spent a long period going through a prolonged lawsuit, in which it settled for $18 million. Most recently, some of its co-founders sued Trump Media for their share accumulation.

There are a few reasons why DWAC stock jumped. First, DWAC became a meme stock as it became highly popular among day traders. It is usually one of the most discussed companies in social media platforms like StockTwits and Reddit.

Second, the company has become a proxy on the US election. Most recently, it has soared as Donald Trump has expanded his lead against Joe Biden. A recent poll showed that he had a 10-point lead in Michigan, a key battleground state.

Third, DWAC became a popular stock among Donald Trump fans. Trump has a cult following in the US, despite his flaws. Most of these fans have bought the stock as a show of support.

Most recently, Digital World jumped as investors predicted that the merger with Trump Media will go through.

DJT stock will be much risker than DWAC for several reasons. For one, as a shell company, DWAC’s financial results had nothing important to show. DJT will be different since the company will be required to publish its quarterly results.

Judging by Truth Social’s user numbers and finances, there is a reason to worry. For one, the company has struggled to gain traction in the social media industry. It is only used by a few million people around the world.

The company is also losing substantial sums of money every quarter as it continues its investments in technology and marketing. Therefore, there is a likelihood that the DJT stock price will dip when it delivers its first earnings report.

Second, Trump Media is inherently overvalued. It will go public at a valuation of over $6 billion. Reddit, a popular social media platform went public with a $6.4 billion valuation. There is no way that Reddit and Truth Social have a similar valuation.

In January, X (Twitter) valued itself at $19 billion. A $6 billion valuation means that Truth Social is about 32% the size of Twitter, a platform that has over 206 million daily users. 

Third, there is a likelihood that DJT will face some substantial insider selling when the lock-up period expires. Trump is in a deep financial hole as he seeks to raise over $500 million from a lawsuit in New York. This means that he will likely tap these funds to cover his legal bill.

Further, as I have written before, Trump Media, like other right-wing media companies, will likely struggle to attract mainstream advertisers like Colgate-Palmolive, Toyota, General Motors, and Procter & Gamble. Like Rumble, it will likely depend on smaller advertisers. 

Therefore, while DWAC has been a successful meme stock, DJT will start being valued by its fundamentals. In this case, I expect its stock to jump initially and then retreat in the long term.

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