Former President Donald Trump scored a clear financial victory with his media startup, Trump Media & Technology Group. If the company goes public, possibly as soon as this week, Trump's ownership stake could be worth more than $3 billion.
But many investors seem to think Trump's business will fail. Trump's startup plans to go public through a merger with Digital World Acquisition Corporation (DWAC), a special purpose vehicle that has been trading since 2021. DWAC stock soared from its opening price of $10 to $10 after announcing plans to merge with Trump's startup. The highest price in 2022 will be $98.
Since then, the stock price has fallen to around $50, but there is still a lot of negative sentiment that is not factored into the stock price. “We have great confidence (Trump pun intended) that stock prices will decline significantly in the short term,” Ihor Dusaniowski, managing director at S3 Partners, said in an email.
Short interest in DWAC stock (bets that the price will fall rather than rise) is about 11% of outstanding shares, according to S3. This is expensive, but not unheard of. The average short interest for public companies ranges from 3% to 4%, but if a trader thinks the stock is doomed, the short interest he has can reach 40% or more.
However, there are very few DWAC stocks available for short-term trading, making it very expensive to bet on the stock. In other words, rising short interest is a strong indicator of negative views about a company's prospects. “There is very little inventory available to support new short sales,” Dusaniwski said. “But short sellers remain in the trade, paying more than 200 times the average borrowing rate for short sales in the US.”
DWAC has essentially become a meme stock, a kind of viral sensation that garners investor interest beyond what the company's fundamentals would normally suggest. That clearly stems from Trump's notoriety and the fervent belief some of his supporters have in his “Make America Great Again” movement.
Many of the buyers who have driven up the price of DWAC are individual investors who have expressed loyalty to Mr. Trump himself. But there is plenty of anecdotal evidence that other buyers are betting on the bubble and hoping to sell before it bursts.
“DWAC will drop to $2.50 after the merger,” one investor posted on Reddit's meme stock channel WallStreetBets. Others have suggested that anyone who holds stocks long-term is a “MAGA bag holder” who is essentially putting money into President Trump's pockets.
Short sellers who bet on DWAC have lost money so far this year as the stock rose on hopes for the merger to close and Mr. Trump to return to the public markets. But there are several reasons to think Trump would struggle and shareholders would suffer if it went fully public.
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First, Trump's flagship social networking app, Truth, is a money-losing app with no clear advantage over competitors like Company X and Facebook, other than Trump's own divisive appeal. He's a niche player. The company has little revenue and has suffered millions of dollars in losses since its inception in 2022.
Another risk is President Trump's own stake in the company, which trades under the ticker DJT (the same symbol as Trump's casino company, which went bankrupt in 2004). President Trump will own at least 55% of the combined company, valued at at least $3.3 billion. At the current valuation. But Mr. Trump has a strong incentive to sell the stock to pay for legal costs associated with four ongoing criminal cases and two civil cases that have resulted in more than $500 million in fines and fees. There is a possibility.
Under the terms of the merger, President Trump must wait six months before selling any shares in the public company. However, it is still possible to sell the stock by October. The company's board could waive this rule, which seems plausible given that the board is made up of Trump's cronies as well as his son Donald Jr. .
If Mr. Trump sells his stock, or if investors even believe that Mr. Trump is likely to sell his stock, there will be downward pressure on stock prices, as typically happens when insiders sell. become. If President Trump dumps a large amount of stock in a rush to raise funds, his stock price could plummet.
Stock prices have already fluctuated on news related to Trump's personal finances. On March 25, a New York court lowered the amount Mr. Trump must pay to appeal his civil corporate fraud conviction from $464 million to $175 million. DWAC stock soared nearly 20% on the news, which suggested President Trump was unlikely to sell his company's stock to raise funds. In the case of publicly traded stocks, this is unusually sensitive to personal economic characteristics, and could easily go in the opposite direction if President Trump reverses.
The third risk is that Trump, the likely 2024 Republican presidential nominee, will lose to incumbent President Joe Biden in November. A second loss to Mr. Biden would leave the 77-year-old Mr. Trump with little political future, other than some sort of honorary Republican leadership position. Instead of being a “place” for Trump supporters to have conversations, Truth Social will become a remnant of the Trump movement. What Trump's company does excel at is its unique way of monetizing his political beliefs about the outcome of the 2024 presidential election.
Rick Newman is a senior columnist in the United States. Yahoo Finance. Follow him on Twitter @rickjnewman.
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