DWAC Soars As Trump Media Deal Closes
Contributor since 2014 / 50094 Followers
Summary:
- Digital World Acquisition Corp. has soared 40% as its deal with Trump Media & Technology Group officially closes.
- The new company, Trump Media & Technology Group Corp., will begin trading on Tuesday under the ticker ‘DJT’.
- The main asset of DJT is the Truth Social platform, which aims to compete with Facebook and Twitter but has a smaller user base.
Michael M. Santiago/Getty Images News
Article Thesis
Battleground Stock Digital World Acquisition Corp. (NASDAQ:DWAC) has soared on Monday as the deal with Trump Media & Technology Group has closed and the new company will likely begin trading on Tuesday. While speculation could push shares even higher, I remain neutral and am staying on the sidelines — it is far from guaranteed that the company will be very profitable in the future.
Past Coverage
I have not covered Digital World Acquisition Corp. in a while but wrote about the company first around two and a half years ago in an article titled Speculating on A Trump Social Media Empire. I gave the company a neutral rating back then, which has worked out well — shares are up, but have slightly underperformed the broad market, thus focusing on other opportunities was the better choice.
What Happened?
On Monday, shares of Digital World Acquisition Corp. are up a hefty 40% at the time of writing, soaring to almost $52 per share. The reason for the strong share price performance for DWAC is that the deal to combine with Donald Trump’s media company has officially closed. The road to close this deal has been long and there were ups and downs, but the two companies have now crossed the finish line. Seeking Alpha reports that the new company, which will be named Trump Media & Technology Group Corp., will begin trading on Tuesday, using the ticker ‘DJT’ (the initials of former President Donald Trump). DWAC shareholders voted in favor of the deal on Friday, which allowed the two companies to close the deal on Monday. This followed the earlier news about the SEC approving the combination of the two companies in February.
It looks like investors are happy that the deal has now officially closed, and based on the strong share price reaction, it looks like there was still considerable fear that the combination would not work out. Otherwise, a share price jump of close to 40% would not make a lot of sense.
It is, of course, also possible that additional factors played a role in the strong share price increase, such as shorts covering their positions or investors speculating on further share price gains as the deal gives the company increased media attention. finviz.com reports that the short float for DWAC is 11%, but these numbers may not be up-to-date. If that number is true, short covering could be a very meaningful factor explaining the pronounced share price reaction we are seeing on Monday.
Due to these factors — media and investor attention, speculation, shorts covering — it is very hard to forecast what near-term price movements might look like. I believe that there is a very good chance that shares will remain highly volatile in the near term, but whether shares will rise further or whether a share price pullback is more likely is unknown.
What The New Company Will Look Like
From Tuesday, the newly combined company trading under the DJT ticker will be headed by Devin Nunes, who has already been Trump Media & Technology Group CEO before the deal.
The main asset of DJT is the Truth Social platform, which was launched a little more than two years ago, and which has around 5 million users according to research company Similarweb, although reports suggest that the user count has been moving up and down over time and that activity is somewhat uneven.
Truth Social sees itself as a competitor to platforms such as Facebook and X/former Twitter, but size-wise it is not in the same category. Facebook, for example, has more than a billion users across the globe. One could argue that Truth Social is more of a competitor to Parler, Gab, and other smaller social networks with a Republican-leaning user base. That being said, Truth Social is not a Republican-only social network, as politicians and users from both parties (as well as independents and non-US users) are active on Truth Social (Donald Trump, Gavin Newsom, etc.).
How Is DJT Company Valued?
DWAC was trading with a market capitalization of around $1.4 billion before the deal announcement, but the pro-forma market capitalization of the new DJT company will be significantly higher. After all, following the combination of the two companies, current DWAC shareholders will not own all of the new Trump Media & Technology Group Corp. Instead, based on data in a previous DWAC/TMTG presentation, DWAC shareholders will own around 13% of the combined company. Based on a DWAC share count of around 29 million and a DWAC share price of around $50, this suggests an implied market capitalization of $11 billion for the new Trump Media & Technology Group Corp.
This is way less than the value of Meta Platforms (META), the owner of Facebook, Instagram, and WhatsApp, as META is valued at around $1.3 trillion, or roughly 100x TMTG’s market capitalization. Then again, if the 5 million user count number for Truth Social is correct, Meta Platforms has more than 100x the user count compared to TMTG/Truth Social, thus on a per-user basis, META would be the less expensive company among these two. With META already having billions of users across its platforms, its future growth potential could be more limited, as Truth Social could, at least theoretically, grow its user count by hundreds of percentage points. But whether that will actually happen is not known — I personally am not very interested in speculating on that. From a profitability and balance sheet perspective, META naturally is the stronger company and, I believe, the better pick as well. Last but not least, META offers shareholder returns via both dividends and buybacks, which does not hold true for TMTG.
Is DWAC A Good Investment?
DWAC undoubtedly was an excellent speculative investment for those who bought shares at the lows. For someone holding shares on January 1, 2024, year-to-date returns have been as high as 190%, which even beats market darlings such as Nvidia (NVDA).
That being said, it is far from certain that DWAC (or, starting from Tuesday, DJT) will continue to outperform the market. Speculation could drive shares even higher, but until Truth Social shows resilient user growth and improving financial results, those gains would be speculation-driven. From a valuation basis, shares look rather pricey here, going by the market capitalization per user metric relative to how social media king META is valued.
I do not think that shorting DWAC/DJT is a good idea, as shares could continue to soar if sentiment remains strong and as the closing of the deal results in considerable media attention. I am thus not interested in shorting this company at all. But I also am not interested in going long, as the fundamentals do, to me, not suggest that DWAC/DJT is trading below fair value. Of course, others might see things differently, and that’s what makes a market. I’m staying on the sidelines and will evaluate the company further when more financial results are made available over the coming months and quarters.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of META either through stock ownership, options, or other derivatives. 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.
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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