Trump SPAC: Is It Risky to Invest in the Social Media Stock?

Mohit Oberoi, CFA - Author

Dec. 22 2021, Published 9:20 a.m. ET

Former President Donald Trump was never a fan of big social media companies even though he used their networks extensively during his presidency. Now, he's coming up with his own social media network to take on the likes of Facebook and Twitter. The company is going public through a merger with Digital World Acquisition (DWAC), which is a SPAC. The stock has been on a fire ever since it announced the merger with Trump’s TMTG (Trump Media and Technology Group).

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DWAC stock went as high as $175 but has since fallen. It's trading around the $50 price level. While the stock has crashed from the peaks, it is still up 400 percent from the IPO price. Apart from Churchill Capital IV (CCIV), the SPAC which took Lucid Motors public, it's hard to think of any other SPAC that saw such a buying frenzy ahead of the merger.

Trump’s SPAC is a bet on his popularity.

If you buy Trump’s SPAC, you're betting on his popularity. The former president had 89 million Twitter followers before he was banned from the network. To put that in perspective, President Joe Biden only has 32 million followers. Even Elon Musk has just over 67 million followers.

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The merger presentation mainly harped on Trump’s popularity and the massive market potential for social media companies. Usually, companies provide hard financial projections at the time of the merger. In TMTG’s case, there are a lot of literal question marks.

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For example, TMTG talked about the possibility of reaching 10 million streaming subscribers and projected that its average monthly revenues per user would be closer to $11.73, which is what Netflix makes. Netflix has among the highest average revenue per subscriber, which is almost 3x the number for Disney+.

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Trump’s social media company plans to compete with everyone.

Trump’s social media company plans to compete with streaming giants like Netflix and Disney as well as social media companies like Twitter and Facebook. The company expects to have 81 million users for its yet-to-be-launched Truth Social by 2026. For the streaming service called TMTG+, it's projecting 40 million subscribers by 2026.

TMTG expects to post revenues of $1 million in 2022, which it expects to rise to $3.66 billion by 2026. The company has hired Representative Devin Nunes as the next CEO. He will resign from Congress to lead the company.

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Is it too late to buy Trump SPAC?

There are two ways of looking at Trump’s SPAC. The stock trades at less than a third of its 52-week highs, so bargain hunters might find value after the crash. The other argument is that it still trades at a massive premium to the SPAC IPO price of $10.

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The deal with DWAC valued TMTG at an initial enterprise value of $875 million. However, the company has also done a $1 billion PIPE (private investment in public equity) transaction, which is a complex deal structured as a convertible preferred stock.

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The valuation for TMTG has surged significantly after the sharp rise in DWAC stock. However, if you believe in Trump’s ability to take on the big tech companies, the stock would still appear attractive. That said, there's a flurry of conservative social media channels trying to make their mark.

While these channels have seen rapid growth, none of them comes close to the likes of Twitter and Facebook in terms of total users. Can Trump’s social media company pull it off? His millions of fans think so and that’s what the sharp gains in DWAC stock tell us.

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What's the biggest risk of investing in DWAC before the merger?

DWAC is facing an SEC inquiry over hiding material facts from investors. If the deal with TMTG doesn't go through for whatever reason, DWAC would only be worth $10 plus whatever little interest has accrued on the cash with SPAC trust. Apart from that, the company also faces execution risks as it takes on the mighty social media and streaming companies.


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