Trump’s new social media company looks like a meme stock

By | March 27, 2024

Former President Donald Trump has clearly scored a financial windfall with his media startup Trump Media & Technology Group, which trades under his initials DJT. The company’s value soared when it went public on March 26, with the stock rising more than 16% that day. Trump’s ownership stake could generate more than $4 billion.

DJT is essentially a meme stock, a kind of viral sensation that attracts 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.

The Trump company, which went public through a merger with Digital World Acquisition Corp. (DWAC), a special-purpose vehicle that has been trading since 2021, has little revenue and has lost $41 million over the past two years, according to S&P Capital IQ. Many of the buyers who have driven up the stock price have been individual investors who have declared their loyalty to Trump himself.

But many investors are betting that Trump’s venture will fail. “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.

Short interest in DJT stock – betting that 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 DJT shares 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.”

And there’s plenty of anecdotal evidence that other buyers are betting on a bubble and hoping to sell before it bursts. The stock “will drop to $2.50 after the 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 DJT 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 the Trump company will struggle and shareholders will suffer.

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)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.

Another risk is Trump’s own financial stake in the company, which has the same ticker symbol as a Trump casino company that went bankrupt in 2004. Trump owns at least 55% of the company, and his stake has risen by more than $1 billion as stock prices have risen. appeared when it became public. 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.

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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 of money Trump must post while appealing a civil conviction for corporate fraud from $464 million to $175 million. 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 probably 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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