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

SPAC Merger Approval Posted Digital World Acquisition Corporation and Trump Media and Technology Group Corp. (NASDAQ:DJT), the stock price of DJT (formerly DWAC) soared. This rally took place after a long time. The merger process reflects the excitement of the company’s investor base, which will gain access to an ownership stake in DJT’s flagship product, Truth Social.

However, by all traditional metrics, the company’s stock has been trading at stratospheric valuation levels over the past few months. The level is so high that it is impossible to reconcile it with company fundamentals. My belief is that the stock is behaving in a way much more similar to the “meme stocks” that were common in the financial markets in late 2020 and have recently seen a resurgence, rather than trading stocks based on fundamentals. Because of this, even though it is True Social, Although it has managed to succeed, in my opinion it is unreasonable to expect it to be able to support DJT’s current valuation, and in the long term DJT will likely be better off with Quantumscape (QS) or GameStop(GME), experienced massive declines after the company began trading based on its valuation based on underlying fundamentals.

evaluation

The argument that DJT is overvalued is simple. The company is losing money in the first quarter of 2024, reporting an operating loss of more than $98 million. It also reported only $770,000 in revenue for the same quarter, a year-over-year decline compared to the $1,116,000 it generated in Q1 2023.

These meager sales should support a massive market capitalization of $8 billion, giving DJT a TTM price-to-sales ratio of well over 1000x. Even ultra-high growth companies rarely trade at these multiples. Never mind DJT, which is seeing declining sales. Needless to say, it is almost impossible for this situation to continue. For comparison, let’s take Snapchat (SNAP), a much larger and more established player in the social media market. SNAP’s annual revenue is approximately 1000 times that of DJT, but its market capitalization is still only 3 times that of DJT.

To get a generous estimate of DJT’s true value, we can do a simple comparison with X (formerly Twitter), the market leader in the social media space (microblogging) that Truth Social is trying to compete with. Relying on Fidelity and valuing its stake in

If DJT succeeds in becoming the market leader in the microblogging niche of the social media industry (a difficult feat for which I generously assign a 10% chance of success), the company will probably be valued at slightly less than X currently ( In this scenario, DJT is expected to be valued at around $8 billion.

If DJT fails to become a market leader, the company would probably be worth only $500 million due to the network effects that make social media a winner-takes-all industry. I would assign a 90% probability to this.

If we take the probability weighted sum and apply the discount rate to it, we get $1.25 billion. Since it takes at least two to three years to become a market leader in a niche market, the fair value in our analysis is likely to be around $800 million. Our assumptions about the future of the truth society are probably too positive.

This brief analysis of DJT’s valuation is so conclusive that I won’t go any further into how the valuation doesn’t make sense, but instead try to answer the following questions: If fundamentals don’t drive price, then what?

Factors that determine stock prices

In my opinion, there are 3 factors that influence DJT price:

1. It is part of Trump Supporters, a company that views DJT’s stock as a way to support Trump financially and as a sign of moral support.
2. Meme stocks are speculative due to the stock’s volatility and mainstream attention associated with such public figures.
3. If Trump is re-elected, the president’s communications will be channeled through Truth Social, potentially bringing in a large influx of users and significantly improving the company’s financial situation.

Factor 1 is currently a fairly relevant factor to analyze for anyone looking to trade DJT speculatively in the short term, but over time the interest in buying this stock simply for support is likely to fade, and in 5 years It’s hard to imagine this. Investor groups are still exerting significant buying pressure on Trump when, by then, there is no chance he will even assume a major role in American politics (either already serving a second term or suffering a second election defeat).

Factor 2 can again push prices higher in the short term, but ultimately the hype for almost all meme stocks eventually dies down and market forces drive prices back down to earth, as was the case with AMC, for example.

Factor 3 is more interesting because it presents a long-term threat to the DJT short-term thesis. But Trump’s re-election victory is just one of many things Truth Social must do to achieve a market-leading position in the microblogging space. It also requires adoption by mainstream celebrities and advertisers, which is a huge hurdle to overcome.

The interplay between these three factors is likely to drive DJT prices in the short and medium term. This can lead to interesting and unexpected results. For example, if Trump loses the election, Factor 3 (the likelihood of Trump winning re-election) would be underwater. While we might expect this to cause prices to fall, it’s also possible that the stock could bounce back in the short term due to Factor 1 (Trump supporters trying to show moral support for Trump after his loss).

But overall, the effect of Trump voters buying stocks to show their support and the meme stocks like purchases are expected to weaken and disappear within the next five years, leaving only company fundamentals supporting valuations. In the previous section, there is a high probability that the stock price will fall significantly.

conclusion

Considering the points mentioned above, we expect DJT’s stock to be trading much lower than it is now in a few years. But the path the stock will take to get there could include many large rallies influenced by the outcome of elections and court cases and the future popularity of meme stocks in the market.

It’s unclear how investors can take advantage of this. However, DJT has a distorted options market in which the short-selling borrowing rate is extremely high due to high demand, so the put premium is so high that only a small profit can be made even if the stock price falls significantly.

Therefore, investors may be wise to wait for a more favorable option price or borrowing fee before acting on DJT’s short thesis. Moreover, you should consider the possibility of a large rally along the way when determining your position size and how to best profit from a decline in the stock price.