Trump Media & Technology Group: The Most Overvalued Stocks on the Market (NASDAQ:DJT)

Publication of SPAC merger approval Digital World Acquisition Company And Trump Media and Technology Group (Nasdaq: DJT), DJT (formerly DWAC) shares rose. This rise came against the backdrop of a long period The merger reflects the enthusiasm of the company’s investor base to gain an ownership stake in Truth Social, DJT’s flagship product.

However, by all conventional metrics, the company’s shares have been trading at stratospheric valuation levels over the past few months. Levels so high that it is impossible to reconcile them with the company’s fundamentals. My belief is that the stock is operating in a manner closer to the “meme stocks” that were popular in the financial markets in late 2020, and which have seen a recent rebound, than the stock is trading on fundamentals. As a result, even if it is a social fact DJT has been able to achieve some success, it is unreasonable in my view to expect it to be able to support DJT’s current valuation and in the long term, DJT will likely go the way of other companies like Quantumscape (QS(or GameStop)GME), which saw massive declines after companies began trading on valuations driven by underlying fundamentals.

evaluation

The argument for overvaluing the DJT is clear and straightforward. The company is making losses, reporting an operating loss of more than $98 million in the first quarter of 2024. Furthermore, it only reported revenue of $770,000 in the same quarter, a year-over-year decline from the $1,116,000 reported. Achieved in the first quarter of 2023.

These meager sales are required to support a massive market cap of $8 billion, giving DJT a trailing TTM price-to-sales ratio of more than 1,000x. It’s very rare for even very high-growth companies to trade at these multiples, let alone DJT, which posts low revenues. Needless to say, it is impossible for this situation to continue. Take a larger, more established player in the social media market for comparison: Snapchat (SNAP). SNAP has about 1,000 times the annual revenue of DJT, but despite this, it only has 3 times the market capitalization of DJT.

To make a great estimate of DJT’s true value, we can make a simple comparison with X (formerly Twitter), the market leader in social media that Truth Social is trying to compete with (microblogging). If we lean on Fidelity and value its stake in X, X would likely be worth around $12 billion, 50% more than DJT’s current valuation.

If DJT succeeds in becoming a market leader in microblogging in the social media industry, a difficult feat that I would generously assign a 10% probability of success to, the company would likely be worth slightly less than what X is currently worth (since X, threads, etc. would not They simply disappear as competitors.) In this scenario, DJT would likely receive a valuation of around $8 billion.

If DJT doesn’t succeed in becoming a market leader, due to network effects that make social media a winner-take-all industry, the company would likely only be worth $0.5 billion. I would assign a 90% probability to this.

Taking the probability-weighted amount, we get $1.25 billion, and applying a discount rate to that, since it would take at least 2 to 3 years to become the market leader in this space, the fair value would likely be around $0.8 billion. It is in the analysis that makes assumptions about the future of the Social Truth organization, which are likely to be very positive.

Since this simple analysis of DJT’s valuation is quite conclusive, I will avoid delving into the ways in which the valuation doesn’t make sense, and instead try to answer the question: If fundamentals aren’t driving the price, what is? ?

Factors that determine stock price

In my opinion, the factors influencing the price of DJT are threefold:

1. Part of Trump’s supporters, who view the purchase of shares in DJT as a way to support Trump financially and as a show of moral support.
2. Meme stocks are similar to speculation due to the stock’s volatility and mainstream interest, as a result of its association with such a public figure.
3. The possibility that if Trump wins re-election, presidential communications will be made through Truth Social, resulting in a large influx of users and a significant improvement in the company’s financial situation.

While Factor 1 is currently a completely relevant factor to analyze for anyone looking to trade DJT speculatively in the short term, over time, interest in buying this stock simply for support will likely fade, and in 5 years, it is difficult to envision that. The investor group is still exerting significant buying pressure, while Trump is unlikely to have a major role in US politics by then (either having already served his second term in office, or suffering a second electoral defeat).

Factor 2 could push the price back in the short term, but eventually, the hype for almost all meme stocks died down, and market forces pulled prices down to the floor, as was the case with AMC, for example:

Factor 3 is more interesting, because it represents a long-term threat to the DJT short thesis. However, Trump winning reelection is just one of a number of things that must go well for Truth Social to gain a market-leading position in the microblogging space. Adoption from celebrities and major advertisers will also be essential and is a big hurdle to overcome.

The interplay of these three factors is likely to drive DJT’s price in the short to medium term. It may even lead to some interesting and unexpected results. For example, if Trump loses the election, the third factor (the probability that Trump will win re-election) will be dead. You might expect the price to fall as a result, but it’s also possible that the stock will rise in the short term due to Factor 1 (Trump supporters seek to show moral support for Trump after a loss).

Overall, however, the effects of Trump voters buying stocks to show support, as well as meme stock purchases such as buyouts, are expected to diminish and disappear over the next five years, leaving only the company’s fundamentals to support the valuation — something as shown in is likely to The previous section led to a significant decline in the stock price.

Conclusion

Given the points above, I expect DJT shares to be trading at a much lower price than they are today in a few years. However, the path the stock price will take to get there may include several significant rises along the way, influenced by election results and court cases, as well as the future popularity of meme stocks in the market.

It is not clear exactly how investors can benefit from this. However, since DJT has a very high borrowing rate for short selling due to high demand, the stock also has a distorted options market, with premiums so high, that only small profits can be made from large declines in the stock price.

Thus it may be wise for investors to wait for preferred option prices or borrowing fees before acting on a short DJT thesis. Furthermore, the potential for significant spikes along the way should be taken into account, when deciding on position size and how best to profit from a stock’s decline.