Truth Social slips into the red as Trump Media stock hits turbulence

Trump’s Truth Social merger approved, set to go public on stock market

Donald Trump’s Truth Social is set to go public, with the former president’s stake in the company valued at $3.6 billion.

They say the bigger they come, the harder they fall. That reckoning always comes eventually for meme stocks — and Trump Media & Technology Group appears to be no exception.

Donald Trump’s namesake social media company burst out of the gate on its first day of trading Tuesday, opening at $70.90 and soaring as high as $79.38 as Trump fans and opportunistic traders bought up shares. But the price faded late in the session and has bounced along at lower levels ever since, ending Thursday down $4.26 at $61.96.

Its market valuation, just over $8 billion, is still stunning for a social media fledgling with an unproven business model that has struggled to attract users and advertisers, burned through cash and wracked up losses.

“The valuation of the company should be several hundred million, not the billions it is currently valued at,” University of Florida professor Jay Ritter said.

Thursday’s slide into the red could be just the beginning, market observers say. Ritter predicts the vanity stock ticker DJT will bottom out around $2 a share – or worse.

“The stock will continue to be very volatile, with sharp moves up and down. But the long-term trend will be down,” he said. “The company has about $2 in cash per share, but it will probably burn through that money and the most likely outcome is eventual bankruptcy.”

Trump also used a vanity ticker for his Atlantic City casino business, Trump Hotels and Casino Resorts, when it went public in 1995. The company never turned a profit and ended up bankrupt in 2004.

Trump Media trading like meme stocks

Trump Media’s trading has mimicked meme stocks like GameStop and AMC Entertainment, which rose to improbable heights in 2021 after individual investors organized on social media platform Reddit to drive up the stock price. Those investors aimed to strike back against hedge funds that had bet against the company and shorted the stock.

“It has all the ingredients to be a volatile stock,” said Jonathan Brogaard, a finance professor at the University of Utah who has researched meme stocks.

What’s tricky is predicting when a meme stock will collapse, said Derek Horstmeyer, a finance professor at George Mason University in Virginia, who specializes in corporate finance. The only hard-and-fast rule? “Eventually, it does,” Horstmeyer said.

Stock price is still high: Is Trump Media overvalued?

Like typical meme stocks, Trump Media is overvalued compared with other social media companies, at least by conventional Wall Street standards. It recorded $3.3 million in revenue in the first nine months of 2023 and a loss of $49 million, but its market value is more than 2,000 times its estimated annual revenue compared to Reddit at 10 times, Meta at 7 and Snap at 6.

“The only way to get to that number is to imagine some sort of immense growth in the platform,” said Brent Goldfarb, a professor at the University of Maryland’s business school and co-author of “Bubbles and Crashes,” a book on financial market bubbles.

But Goldfarb sees “no path to profitability” for Truth Social.

“Unless you believe that Truth Social is the next Facebook or TikTok, I don’t see a reason (for it to be valued this high),” he said.

Truth Social trades on the Trump brand, following

Trump Media’s flagship product, Truth Social, trades on Trump’s personality and brand and, while powerful, that comes with risks. Just ask Trump Media.

In addition to Trump’s “death, incarceration or incapacity,” there’s his checkered business history that includes the bankruptcy of the Trump Taj Mahal in 1991 and the Trump Hotels and Casinos Resorts bankruptcy, according to the risk factors listed in a Trump Media regulatory filing.

“A number of companies that were associated with President Trump have filed for bankruptcy,” the filing states.

Trump’s Truth Social has far fewer users than Facebook, TikTok

And, unlike other social media and tech companies that trade on the expectation of growth, the number of users of Truth Social has declined.

Trump Media was formed in 2021 after the former president was barred from major social media platforms after the Jan. 6 attack on the Capitol. Truth Social debuted in 2022 as an alternative to Twitter, now known as X, and serves as Trump’s preferred bullhorn.

Last month, Truth Social had five million desktop and mobile visitors, according to Similarweb, a data and analytics company. Facebook, on the other hand, has 3 billion monthly active users. Truth Social does not release user figures.

“The stock is a way to invest in Trump. The ticker DJT is not a coincidence in any way,” Goldfarb said. “It’s a perfectly above-board way to push money into his pockets.”

Trump supporters are propping up the stock price

Trump supporters banded together on social media to lift the stock even before Trump Media completed the merger with Digital World Acquisition Corp., a special purpose acquisition company, or SPAC, on Monday. It started trading on Tuesday.

Teri Lynn Roberson, couldn’t care less about the business fundamentals.

Roberson, 52, from the Dallas-Fort Worth metroplex in Texas, said she purchased five shares of Trump Media at about $72 a pop, right around the stock price’s Monday peak, to show her support for the former president.

“It’s mainly to support Trump and his legal battles,” she said.

Horstmeyer expects Truth Social’s stock price to swing 10% or more on a daily basis in the coming months. But because the stock’s price is based on sentiment, not hard metrics like revenue and cash flow, the pattern is difficult to anticipate.

“It could either go down to $10 or up to $150,” he said. “The only thing I can predict is volatility.”

How much is Donald Trump worth with DJT stock gains?

Trump Media’s Nasdaq debut padded Trump’s wealth by about $5 billion – though only on paper.

And cashing out won’t be easy. Trump Media has restrictions that prevent insiders from selling shares or using shares as collateral for loans for at least six months.

The board which is stacked with Trump allies could waive those restrictions. It could also hold a secondary offering to allow insiders an earlier opportunity to sell.

The risk for Trump Media: If Trump sells shares, it could deflate the stock price.

“Donald Trump has substantial paper wealth in the stock, but the ability to turn it into cash is limited,” Ritter said. “By the time he can sell shares, the price is likely to be in the single digits. And the more shares that he sells, the lower will be the price.”