These investors think Trump’s new publicly traded company will flop

By | March 26, 2024

Former President Donald Trump has clearly scored a financial victory with his media startup, Trump Media & Technology Group. Once the company goes public, likely this week, Trump’s ownership stake could fetch more than $3 billion.

But many investors seem to think Trump’s venture will fail. The Trump startup will go public through a merger with Digital World Acquisition Corp. (DWAC), a specialty vehicle trading since 2021. After unveiling its plan to merge with Trump’s startup, DWAC’s stock rose from its opening price of $10 to a high of $98 in 2022.

The stock has since fallen back to around $50, and there is still a lot of negative sentiment that has not yet been priced into the stock. “There is tremendous belief (Trump pun intended) that there will be a significant share price decline in the near term,” Ihor Dusaniwsky, managing director at S3 Partners, said in an email.

The short interest in DWAC stock – which assumes the price will fall rather than rise – is around 11% of shares outstanding, according to S3. That’s high, but not unprecedented: The average short interest in publicly traded companies is between 3% and 4%, although short interest can reach 40% or more if traders think a stock is doomed.

But there are very few DWAC stocks available to execute short trades, making it extremely expensive to bet against the stock. That means elevated short interest is a strong indicator of a negative view of the company’s prospects. “There is very little inventory available to support new short sales,” Dusaniwsky said. “But short sellers remain in this trade, even though they pay more than 200 times the average equity lending rate for a U.S. short sale.”

DWAC has essentially become a meme stock, a kind of viral sensation that is attracting investor interest beyond what the company’s fundamentals would normally suggest. This clearly stems from Trump’s fame and the fervent belief that some supporters have in his “make America great again” campaign.

Many of the buyers who have driven up the price of DWAC have been individual investors who have declared their loyalty to Trump himself. But there is plenty of anecdotal evidence that other buyers are betting on a bubble and hoping to sell before it bursts.

“DWAC drops to $2.50 post-merger,” one investor posted on Reddit’s meme stock channel, WallStreetBets. Another suggested that anyone who holds the stock for the long term is a “MAGA bagholder,” who will ultimately end up putting money in Trump’s pocket.

Short sellers betting on DWAC have lost money so far this year as shares have risen in anticipation of the merger’s completion and Trump’s re-emergence on the public markets. But there are several reasons to think that the Trump company will struggle, and that shareholders will suffer, once the company goes fully public.

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CHICAGO, ILLINOIS - MARCH 25: In this photo illustration, Republican presidential candidate former President Donald Trump's social media platform Truth Social is shown on a tablet on March 25, 2024 in Chicago, Illinois.  The company is expected to go public tomorrow on the NASDAQ market, trading under the ticker symbol DJT.  Trump reportedly owns about 58 percent of the company, a stake that could be valued at about $3 billion.  (Photo illustration by Scott Olson/Getty Images)

Former President Donald Trump’s social media platform Truth Social is expected to go public on the NASDAQ market tomorrow, trading under the ticker symbol DJT. (Scott Olson via Getty Images)

First, the Trump company’s main business, the Truth Social networking app, is a money-losing niche player that has no clear advantage over competitors like X and Facebook, aside from the divisive appeal of Trump himself. The company has little revenue and has lost millions since launching in 2022.

Another risk is Trump’s own financial stake in the company, which will trade under the ticker DJT — the same symbol as a Trump casino company that went bankrupt in 2004. Trump will own at least 55% of the combined company, worth at least $3.3 billion. at current valuations. But Trump could have a strong incentive to sell stock to pay legal fees related to four criminal cases he is fighting and two civil cases in which he has faced more than $500 million in fines and fees.

Under the terms of the merger, Trump must wait six months before he can sell shares in the publicly traded company. But that would still allow him to sell shares by October. The company’s board could also waive that rule, which seems plausible given that it consists of Trump cronies plus his son, Donald Jr.

If Trump sells shares in his own company or investors even think he is likely to sell shares, that would put downward pressure on the stock price, as normally happens when an insider sells. If Trump were to dump a lot of shares to raise money quickly, the shares could fall in value.

The stock price is already fluctuating based on news about Trump’s personal finances. On March 25, a New York court reduced the amount Trump must pay while he appeals a civil conviction for corporate fraud from $464 million to $175 million. DWAC shares jumped nearly 20% on the news as it suggested Trump would be less likely to sell his own company’s stock to raise money. For a publicly traded stock, that’s extraordinary sensitivity to one person’s financial disposition, and it could easily go the other way if Trump suffers setbacks.

A third risk is that Trump, who will likely be the Republican presidential candidate in 2024, will lose to incumbent President Joe Biden in November. A second loss for Biden would offer the 77-year-old Trump little political future, except as a kind of emeritus boss of the Republican Party. Instead of being a place for Trump supporters to talk to each other, Truth Social would become a relic of the Trump movement. One thing Trump’s company is sure of is a unique way to monetize your political beliefs about the outcome of the 2024 presidential election.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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