Digital World Acquisition: It’s Time To Short The Trump Bump (Again)

Summary:

• Digital World Acquisition’s SPAC may take former President Trump’s social media company public, but it’s unclear if anything has changed in its flagship platform to warrant a higher share price.
• Truth Social has significantly fewer monthly active users compared to X (formally Twitter), and major global social media platforms like Facebook, Instagram, and TikTok.
• If Trump becomes the President again in 2025, Truth Social could benefit as his main mode of communication, but the platform’s financials and revenue sources remain weak.

I’ve previously discussed the long-term prospects of Digital World Acquisition (NASDAQ:DWAC), the SPAC destined to take former President Trump’s social media and technology company public around the end of the year, which I shorted.

While the deal may create some value for the social media company, as ‘blank check’ companies tend to do, it’s unclear if anything fundamental has changed in its flagship social media platform, Truth Social, or any other part of their business for that matter, to warrant the recent share price surge.

The platform has about 900,000 monthly active users, which pales in comparison to X (TWTR) which has over 415 million monthly active users. This is only a modest increase from the roughly 513,000 monthly active users the platform had about a year ago. Furthermore, both of these platforms still attract significantly less than the major global social media platforms like Facebook (META), Instagram, and TikTok (BDNCE), all of which have over 1 billion monthly active users a pop.

There is, however, one aspect that can justify the recent surge in the SPAC share price – if the former President becomes the current President in 2025. Since the former President used Twitter (now known as X) as his main mode of communication throughout his first term, Truth Social is all but certain to be that communication method in any future administration, which is all but certain to attract millions of people to the platform. I’ll touch briefly on the risks associated with the 2024 United States Presidential election.

Putting that last point aside though, not much has changed in the company’s fundamentals. They reported roughly $3.8 million in advertising revenues in the first nine months of 2023 (full year 2023 results pending after the SEC scrutinized misrepresentations the company made to investors), which cost them tens of millions to generate, resulting in a net loss of $49 million for the quarter. While a win in 2024 will generate a potential ad revenue windfall, any other scenario, I believe, means the company continues to burn through tens of millions of dollars every year without any meaningful revenue sources.

Let’s take a walk down memory lane and see where I think things are headed.

Price Action: What’s Up?

The company has faced a rollercoaster price action since it first IPOd.

Reality Setting In

When DWAC initially IPOd, there was quite a bit of hype around SPACs in general and around the former President in particular. Folks bid up the company’s share price, which peaked at $97.54 per share on March 4th, 2022. Since then, and as the company began reporting their actual financials, share price has come back down to earth and has been trading at around the $15.00 per share mark until the past few weeks.

There’s a reason the company was trading at $15.00 per share – it doesn’t actually make any money. As reported by a New York Times (NYT) researcher, there are no major brand advertisers on the platform, which other social media and online companies rely on for recurring revenues. Here’s what is on there, according to the research:

…Ads from major brands are nonexistent on the site. Instead, the ads on Truth Social are for alternative medicine, diet pills, gun accessories and Trump-themed trinkets…

While there’s no wrong way to make money, these businesses are notoriously unsustainable, as they rarely get recurring sales. That and the amount of scams on the site (as mentioned in the aforementioned research article), means that the company is unlikely to see any significant revenues and I suspect they will report roughly the same amount of sales as they have in the past few quarters in the upcoming ones.

The Merger & The Iowa Caucuses

Nonetheless, after the SEC gave the company the nod to merge with Trump Media company alongside the former President winning the Iowa caucuses, the SPAC’s share price surged and is currently up over 200% to around $45.00 per share over the past 6 months.

The hope by investors is twofold. The first is that the former President re-emerging as a political candidate would somehow help Truth Social generate more revenues, and the second is that the blank-check DWAC can act as an ‘endless’ funding source for Truth Social’s expansion efforts.

I don’t believe there is much merit to the idea that DWAC injecting Truth Social with cash would actually help them. We know from the company’s initial expansion plans that they are destined to spend heavily on penetrating new media markets but have no plans (as of yet) to actually generate any profits. Increasing expenses without any meaningful avenue to generate revenues, won’t do much for the value of DWAC and until it does, they will continue to burn through more than $35 million a year.

When it comes to the first bit, though, there’s some merit to the argument that a win by former President Trump in 2024 could generate growth in ads. Even so, I have some thoughts worth considering.

The 2024 Election: A Risk Assessment

While everyone can make their assessments of how they think the 2024 election will go, there are a few facts worth noting as we relate the outcome of the election to the future of DWAC as an investment. A few points to consider:

1. While polling does currently show former President Trump in the lead in several of the swing states needed to win the electoral college, these leads are well within the margin of error and he is not reaching 50% in any of them.

This indicates a large number of undecided voters, most of whom support Democrats on other ballots (Trump up by 3% in latest Wisconsin poll while Democrat Senator up 7%) like Senate and House races but don’t profess their support for President Biden, Trump’s opponent. In the states of Arizona, Nevada, Wisconsin, Michigan, and Pennsylvania, while former President Trump leads President Biden in most polling, the Democrats in those Senate races lead their opponents by significant margins. This may indicate that while their satisfaction with President Biden is lackluster, in a two-way race, it’s likelier than not that they end up voting against Trump.

2. As we’ve seen in the last few election cycles, there have been changes in demographics across the country and even though former President Trump was no longer actively running for office, certain groups in the suburbs have been moving rapidly away from his political party while some minority groups have been heading in the opposite direction. For the 2024 US Presidential election, the states that matter the most for a win in the electoral college, which is how the United States elects their Presidents, suburbs make up a significantly larger share of the electorate than those with minority voters, meaning that those states are likelier than not to move against Trump.

The proof is in the pudding on this one. In the 2020 Presidential election and the 2022 midterm elections, these swings resulted in President Biden’s political party losing ground in large urban areas while gaining traction in states with huge suburban populations, primarily in swing states like Michigan, Pennsylvania, Georgia and Arizona.

But… What If?

However, even with those factors in place, there is always the potential that the election ends up playing out exactly as the polls currently suggest and Truth Social becomes the de facto White House communications avenue, resulting in tens of millions of people flocking to the social media platform.

Even if this becomes a reality, there’s still little to suggest to me that the company’s financial difficulties will be solved by an increased number of users.

Firstly, the company’s revenues are not guaranteed to increase. X, since Elon Musk bought the platform, has lost a considerable amount of its advertisers, meaning that even with mass layoffs, they are unlikely to be making any money. With Truth Social being an amplified version of what pushed advertisers away from X – it is unlikely, I believe, to generate enough ad sales to overcome their overall expenses incurred in normal business operations.

Second, while revenues are all but certain to increase if it becomes a major social media network, it’s not clear if that’ll be enough. As I mentioned earlier, even if we take the CEO’s number of X active users of over 520 million, they have roughly 580x the user base of Truth Social, yet have not reported a net profit on revenues of around $3.5 billion (excluding tax benefits). Doing business costs money and it’s not clear how Truth Social can make any profits in this environment.

Another Risk: Trump’s Legal Woes

There’s another risk associated with former President Trump’s legal troubles – his need to pay over $450 million in cash he may not currently have.

Former President Trump will own 79M shares, roughly 69% of the company, worth as much as $3 billion, according to estimates, once the merger is complete. Trump potentially selling some of those shares to pay for his legal troubles may adversely affect the value of the company as many investors see his direct involvement as a main reason to be optimistic in the stock.

Investors should be aware of these legal troubles and how the former President raises the cash to pay them in the coming weeks, as it may result in significant selling pressure on the merged company.

Conclusion: I’m Shorting Again

To sum things up – while risks exist, I don’t believe that the company has any meaningful avenue to generate any material profits in the next 3-5 years. Even if former President Trump becomes current President Trump, while the share price will without a doubt rocket higher, I can’t see any real value in the company given that it’s unlikely they still make any money.

While the company’s share price has rocketed and is trading around $45.00 per share, I am again shorting the company with a $15.00 share price target.

My short position is intended to last a few quarters, and given that the 2024 US Presidential election is going to occur within my anticipated timeframe, I am going to use long-term call options to mitigate any potential surge in share price as a result of a potential win by former President Trump.

Quantities are based on each investor’s risk appetite, but as I am shorting the company’s shares, I am using $55, $60 and $100 strike prices on the January 2025 options and will assess other ‘options’ as the stock moves.

I remain highly bearish on the company’s long-term prospects and will be re-initiating my short position in the company.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in DWAC over 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.

Opinion, not investment advice.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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