Trump and Dump

What are we to make of DJT?

This post was written over the past weekend and has not been updated for market or other developments since then. As I prepare to hit ‘send’, I see that DJT opened up Monday morning down another 6% or so and we may well see the stock slide further (or not) in coming days.

It may well be that Donald Trump has finally found a way out of his mounting financial difficulties, by virtue of the recently completed merger of Trump Media and Technology-Group (Trump Media), the owner of Truth Social, and the publicly traded SPAC Digital World Acquisition Corp (DWAC). And if this proves to be the case, the beleaguered ex-President may find that he no longer needs to peddle athletic shoes, cologne or bibles to make ends meet. But I wouldn’t bet on it.

A lot has been written recently about Trump Media going public via the merger with DWAC and about the gyrating share price of the merged company, whose NASDAQ ticker symbol has (not surprisingly) been changed to DJT. Following completion of the merger with DWAC on March 22, Trump Media’s shares initially traded as high as $80, valuing the equity of Trump Media at $11 billion and Trump’s 57% personal stake at $6.3 billion. (Trump stands to receive additional shares in the coming weeks if DJT’s share price stays above $17.50 for 20 consecutive trading days, which will increase his ownership stake to around 66% or so.) Over the following two weeks, however, the shares lost half their market value, closing this past Friday at $40, which values the company at $5.5 billion and Trump’s personal stake at $3.2 billion ($3.6 billion pro forma).

Even at the reduced share price, this is a remarkable valuation for a company with just 3 million active users, total ad revenue of $4 million and net losses of close to $60 million (2023 results). By contrast, the recently IPO’ed Reddit has a similar market cap as DJT ($7+ billion) with about 100x the volume of user activity and annual revenues 200x as large ($800 million vs $4 million). The only hard asset of note in Trump Media is $300 million of operating cash contributed by its merger partner DWAC, apparently now reduced to $200 million (per a recent Trump tweet), worth about $1.50 per share (on the expanded post-merger share count).

Warren Buffett likes to say that “price is what you pay; value is what you get”. And I have no doubt that Warren Buffett would see very little of value in Trump Media or DJT. In the dozens of news articles and blog posts I have read about DJT—admittedly few of which came from Truth Social—I have yet to find even a single credible source who believes that Trump Media as currently constituted has any significant value as an operating business, notwithstanding the Trump ‘brand’. And yet the stock market seems to think this company is worth $5+ billion, for now at least.

So what’s going on here, from a financial perspective? How did we get to this point? And how might things play out going forward?

Let’s explore.

Digital World Acquisition Corp. To understand what is going on today with Trump Media, trading as DJT, it is helpful to know a bit about the history of the company which is responsible for bringing Trump Media to the public market, Digital World Acquisition Corp (DWAC). DWAC was one of over 850 special purpose acquisition corporations (SPACs) which went public during the crazy days of covid, when the Fed and the US Treasury pulled out their global financial crisis playbook and again flooded the economy with liquidity in order to avoid a repeat of the Great Depression of the 1930s. In large part as a result of the more or less free money on offer from the government, financial speculation in the stock market reached levels last seen during the dot.com days of the late 1990s, a bubble which burst rather spectacularly as we entered the new millennium. In this hyperactive “risk on” environment of 2020-21, SPAC IPOs raised more than $250 billion of funds to be warehoused pending future mergers with operating companies who needed capital but were unwilling or unable to navigate the IPO process on their own. Not all of this money was invested wisely, and the share price performance of post-merger SPACs (so-called de-SPACs) has generally been pretty poor. [For more on SPACs, read here.]

Not all SPACs were created equal of course. There were some SPACs of relatively high quality and more than a few which should not have seen the light of day. And I think it's fair to say that DWAC was by most accounts closer to the latter category than to the former. DWAC was founded in 2021 by ARC Capital, a Shanghai-based firm which specialized in listing Chinese companies on American stock markets and which was a target of SEC investigation for misrepresenting the investment merits of shell corporations. Despite the questionable pedigree of its principal sponsor, however, DWAC was able to go public in September 2021, raising $250 million from 400,000 retail investors (and others), at a price of $10 per share. (SPACs traditionally price their shares at $10, equal to the per share amount of cash raised in the IPO.) Just six weeks later, DWAC announced the signing of a definitive merger agreement with Trump Media, which at the time had not yet launched Truth Social, but was looking for the cash to do so.

In response to the October 2021 merger announcement, DWAC shares immediately traded up to an intra-day high price of $175, before closing on the day of announcement at $96, an increase of almost 10x from the IPO price. Four weeks later the shares were down to $43, before jumping back to $98 on the launch of Truth Social. Within six months, however, the DWAC share price was back down to $15, which is more or less where it stayed for most of 2023, as the company worked through a number of legal and other impediments to their agreed merger with Trump Media.

Trump Media. Trump Media is the owner of Truth Social, a right wing social media site with an estimated 10 million registered users, 70% of whom are followers of Donald Trump, far and away the most active user on the site. (Trump reportedly posted almost 100 times on Easter Sunday alone.) Monthly active users on Truth Social are estimated at around 3 million, compared to 550 million on Twitter (X) and 3 billion on Facebook, the two companies cited as “comps” in the DWAC/Trump Media merger proxy. As noted above, Truth Social generates about 1% as much user activity as Reddit and generates 0.5% as much revenue, but the two company’s now have (or had) similar equity market values.

In the year ended December 31, 2023, Trump Media lost $58 million (net income) on just $4 million of total revenue, and burned through almost all of its remaining cash reserves, which have now been replenished through the merger with DWAC. (DWAC reported $300 million of (restricted) cash on its balance sheet at year end, which according to Trump has now been reduced to $200+ million, leaving the company now debt free.

And so until two weeks ago, Trump Media was a struggling private company of uncertain value whose best route to survival seemed to be through completion of the agreed merger with DWAC (and its $300 million of cash), a deal which for most of the past 2+ years had been stuck in legal limbo. In April 2023, Donald Trump valued his controlling stake in Truth Social on an FEC disclosure form at just $5-25 million, which is interesting if only because Trump is not known for conservatism in the valuation of his personal assets. By contrast, the shares of Trump Media’s merger partner DWAC were then trading in the stock market at a price of $15, suggesting a pro forma value for Trump Media (whose shareholders would own 70% of the merged company) at $1.2 billion (discounted for merger completion risk).

On March 22 of this year, DWAC shareholders finally voted to approve the merger with Trump Media, as expected, and the combined company’s shares now trade on Nasdaq under the ticker DJT. As of the merger closing date, approximately 70% of the new company’s shares were owned by former Trump Media shareholders, the largest of which is Donald Trump with a 58% stake (66% pro forma for the issuance of additional shares expected in the coming weeks). Trump Media’s two co-founders, who reportedly met Trump on The Apprentice, together own about 5.5% of the combined company (4.3% pro forma), currently valued at ca $275 million. The former public shareholders of DWAC collectively owned about 23% of the new company—including Representative Marjorie Taylor Greene who purchased her (small) stake in October 2021—and the remaining 7% or so are owned by ARC and other DWAC insiders. For more on the ownership of the public Trump Media, read here.

Devin Nunes will continue as CEO of the new Trump Media and the board will consist of seven directors, six of whom appear to have been selected by Trump personally. Interestingly, Donald Trump will be neither an officer nor a director of DJT, a decision which may release him from some or all of the fiduciary duties he would otherwise owe to the company or other shareholders, a legal wrinkle which may become important if and when Trump decides to exit his DJT shares or transfer ownership to another party. (Lawyers, please weigh in on this.)

DJT’s Current Market Valuation. As noted above, DWAC’s shares traded for most of 2023 at a price of around $15, which implied a pro forma value for the combined company (including DWAC’s $300 million of cash) of $1.5 billion, 70% of which would be owned by Trump Media’s shareholders once the merger closed. When DWAC shareholders voted to approve the merger on March 22, 2024, however, DJT shares immediately traded up to a market value of $80 ($11 billion market cap), before giving back half their value over the next two weeks. As of Friday April 5, the DJT shares were back to $40, about where they were before DWAC shareholders approved the merger on March 22. Which of course is still a big premium to where the DWAC shares traded for most of last year ($15).

Where are the shorts? I think it is fair to say that most objective followers of the DWAC-Trump Media saga will by now have concluded that the combined company is massively overvalued at the post-merger share prices, certainly on any sort of fundamental basis. Which raises an obvious question: If the DJT shares are so greatly overvalued in the stock market, why aren’t the short-sellers all over this trade, driving down the share price to more sensible levels?

The short answer (pun intended) is that this is in fact happening, but the impact of short selling has been limited by the small number of shares available for borrow. DJT has around 137 million shares outstanding, but the vast majority are held by Donald Trump, company insiders and retail investors, not by the large institutional asset managers who are generally the most active lenders of shares. According to a recent NY Times article, there are only around 5 million DJT shares currently available for borrow, essentially all of which have in fact been lent out to short-sellers. many of whom have taken arbitrage positions in DJT shares and DWAC warrants, which continue to trade at fundamentally irreconcilable prices.

Even in the best of circumstances, short selling is not for the faint of heart, and this is particularly true with so-called meme stocks, as we learned recently with GME, AMC and BBBY. Even the biggest hedge funds can take only so much pain while waiting for public equity investors to regain their collective senses, which does not always happen quickly. As JM Keynes taught us, the financial markets can sometimes remain irrational for longer than most of us can remain solvent. And the big question with DJT, I think, is whether the stock market can remain irrational long enough for Donald Trump to earn his contingent shares, generate some much needed liquidity and perhaps even regain his solvency.

How and when will Trump convert his DJT shares to cash? The honest answer to this questions is that I truly don’t know. The most obvious way for Trump to convert his DJT shares to cash is of course for him to sell the shares on the stock market in a series of transactions over time. Trump Media shares have a very limited float, however, with Trump and other insiders owning 75% or so of the total number of outstanding shares. This may make it difficult for him to sell a significant portion of his current 57% stake directly onto the stock market, without some pretty strong tail winds from Trump Media or I supposes the Trump presidential campaign.

It is widely assumed that if Trump were to sell even a small portion of his DJT shares onto the stock market, the DJT share price would collapse, but I’m not so sure. Trump’s political supporters have already contributed over $100 million to fund his legal fees, and perhaps they will be willing again to help him rebuild his depleted cash balances by purchasing some of his DJT shares, even at silly prices. As we saw with GameStop, big institutional investors are not the only ones who can move markets, particularly when large numbers of highly motivated retail investors decide to put their money behind some cause, however questionable. And it is quite possible that Trump and his supporters could pull off something similar here.

As part of the DWAC merger agreement, Trump has agreed not to sell or pledge his shares for 6-months, but this agreement can be waived with the approval of the Trump Media board, six of whose seven members seem to have been selected personally by Trump and who may well interpret their fiduciary duty to the company as equivalent to their obligations (or loyalty) to its majority shareholder. As a 58% shareholder of Trump Media, although not an officer or director, Trump is also subject to various SEC disclosure and trading restrictions which could impede his ability to transact in DJT shares on the stock market, but which would not necessarily interfere with his ability to sell his shares in a private off-market transaction, perhaps to a buyer motivated by non-financial (and perhaps suspect) considerations. (Lawyers, please weigh in here too.)

Which I suspect may well be the most likely outcome here.

Why should we care? The DJT story is an interesting and amusing one, but in purely financial terms it does not really seem all that important. Truth Social is not a large or particularly significant business and I am not sure why we should care, other than for prurient reasons, whether DJT shares trade at $100 or $1. And I for one do not really care if Donald Trump’s supporters make or lose a lot of money betting on Trump Media, or how the hedge funds’ arbitrage positions work out.

But because Donald Trump is asking us once more to elect him President of the United States, I think it is entirely reasonable to insist that the public be informed on a timely basis as to who is keeping our former President financially afloat and how they are doing it, whether via campaign contributions, surety bonds or transactions in DJT shares. And it does not take a Q-Anon caliber imagination to envision a number of very plausible circumstances in which private (or even public) transactions in Trump Media shares could raise serious public interest and even national security concerns.

In closing, let me say that I really have no idea how things will play out between now and November, either with DJT shares or in the coming election. But there is one thing I can predict with some degree of confidence: It will be wild.