Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Many people are saying Truth Social is a meme stock

Trump Media & Technology Group, the parent of the social media platform known as Truth Social, became a publicly company last week to a huge reception from supporters of the former president. In fact, virtually all the shares were purchased by individuals, rather than institutional investors like mutual funds and pensions as is typical in a new offering.

The issuance bypassed the usual IPO or initial public offering process through an expedited procedure using a shell company known as a special purpose acquisition company or SPAC. This alternate route was all the rage in the covid era, expanding from 59 in 2019 to 657 companies in 2021 before losing its luster amid mounting failures. Only 31 SPACs brought companies public last year of which 21 went bankrupt according to Bloomberg.

It is therefore fascinating that the flameout of the SPAC era is punctuated by a brief supernova that bears all the hallmarks of a classic meme stock.

Meme stocks are companies like GameStop whose prices surged in response to viral social media interest without any correlation to financial fundamentals, only to fall back to earth as the hype recedes. SPACs plus memes can ferment into a noxious brew.

SPACs gained popularity as a faster route to taking companies public. Also called blank check companies, they are formed by investor groups to raise capital in anticipation of an acquisition, often without a specific target company in mind.

The shell company sells shares to the public at $10 and invests the proceeds in Treasury bonds. Because there are no operations, the SPAC IPO is simpler than a public offering of an existing firm. Capital is returned to shareholders if no deal is completed within 2 years.

If the SPAC concludes a deal, the target private company is merged with the already public SPAC, bypassing the IPO process. The new entity, often renamed, begins trading and the shell is dissolved. In the case of Truth Social, a SPAC called Digital World Acquisition acquired Trump Media and began trading on March 26 under the ticker symbol DJT.

Trivia buffs may recall a prior incarnation of the ticker DJT under which Trump Hotels and Casino Resorts went public in 1995. The company was never profitable and filed for bankruptcy in 2004. Following a reorganization, the group emerged under the new ticker TRMP which also failed and was delisted in 2009.

In a regulatory filing on April 1, Trump Media reported a 2023 loss of $58 million on total revenue of just $4.1 million. That puts the company’s price to sales ratio, the market value divided by total sales, at a distinctly meme-ish 1,200. For context, Meta (Facebook) trades at 10 times sales with Apple and Google under 7.

According to analytics firm Similarweb, Truth Social attracted only 5 million users to its platform in February, a decline of 50% from the same month a year ago. That compares with 215 million X (Twitter) users and 815 million on Facebook.

More concerning to shareholders should be the company’s own disclosures. Management expects to incur operating losses “for the foreseeable future” and acknowledges “material weaknesses in its internal controls.” The company’s own auditors included a warning that its operating losses “raise substantial doubt about its ability to continue as a going concern.”

Yet the most unconventional aspect of the deal is the way it addresses Mr. Trump’s personal idiosyncrasies. Investor protection demands that public companies adopt a code of ethical conduct, a breach of which is cause for termination. Trump Media specifically exempts the former president from complying with any ethical standard, even if his conduct “could be considered offensive, dishonest, illegal, immoral, or unethical” according to the SEC filing. Fair warning.

Shareholders should buckle in for a wild ride. Shares in the SPAC approached $100 in 2022 before falling 87% amid an SEC investigation and litigation with its former CEO. The impending merger reignited enthusiasm like no one has ever seen, as shares in DJT surged 50% during the first 2 days of trading, only to lose $1 billion in value on news of the dismal financial results.

A major risk for investors is the potential redemption of Mr. Trump’s own shares. Although he invested no capital in the enterprise, Trump was awarded 58% of the stock in exchange for licensing his name to the platform. His stake, currently valued at $3-4 billion based on the market price, is theoretically locked up for 6 months. However, the company’s board, comprised of supporters including Devin Nunes, Donald Trump Jr., and co-founder of World Wrestling Entertainment Linda McMahon, can waive that restriction and allow the former president to sell some or all of his stake to finance his campaign or satisfy legal obligations. Any move to dump a large block of his holdings could obliterate the value of the outstanding shares.

Fast Company Columnist Chris Morris called DJT the “meme-iest meme stock that ever memed”. Morningstar analyst John Rekenthaler suggests it is less a stock and more like a cryptocurrency since it has no cash flows and no intrinsic value but trades as a display of support for the former president. Buyers would do well to view their position as a contribution to a political campaign or legal defense fund rather than an investment. On the bright side, unlike a campaign contribution, any losses on DJT are tax deductible.

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