Many SPAC (special purpose acquisition company) stocks have gone parabolic in the past year after announcing a deal. But few, if any, hold a candle to the blockbuster run Digital World Acquisition Corp (NASDAQ:DWAC) stock went on after announcing its plans to merge with former President Donald Trump’s social media startup, Trump Media & Technology Group (TMTG).
Meme traders fast enough to seize the opportunity and punch in a buy order on Robinhood (NASDAQ:HOOD), profited handsomely, as it took a few hours for it to really skyrocket in price the day the deal news became public (Oct 21).
If they got in right after the opening bell that morning, buying for between $15 and $20 per share, they could’ve cashed out for a 1000% gain within a day. In theory.
On Oct 22, “DWAC mania” briefly sent the stock as high as $175 per share. Of course, the speculative frenzy around this stock has eased considerably.
Falling back to earth not too long after its “to the moon” moves to triple-digit prices, it’s changing hands at around $58 per share. The opportunity to buy this as a meme play has largely come and gone.
So, what’s the best move now with this headline-making stock? Putting it simply, it’s still too pricey at current levels. Put aside your personal view on Trump. It’s valuation, not the man itself, that determines whether this is a good or bad opportunity.
DWAC Stock and Its Short-Lived Meme Mania
In an alternate universe where Trump didn’t hop on that escalator and stayed a celebrity businessman, chances are he would’ve launched a SPAC in 2020. With his name recognition? It’s possible he would’ve raised an amount that would make Chamath Palihapitiya look like a bit player in the blank-check game.
But becoming a private citizen too late to get one launched in time to cash in on last winter’s bubble, Trump is doing the next best thing. He’s merging his recently created startup (TMTG) with this existing blank-check entity.
Although not the backer of the SPAC, Trump’s ubiquity has helped make DWAC stock one of the most talked-about stocks out there among retail investors. Unfortunately, if you’re reading this now, chances are you missed the boat with its now-fading meme mania.
However, if the sell-off continues it may fall to a favorable entry price. The problem is that it has a long way to go before it gets there.
‘Priced for Perfection’ Based on Implied Valuation
With most SPAC deals, typically there’s a slide deck that both details and touts the transaction. However, in the case of DWAC stock and its planned TMTG merger, Digital World hasn’t released one.
However, to spare yourself the time of digging through the SEC filings, a Seeking Alpha commentator has broken down the numbers.
In a nutshell, between the purchase price for TMTG, plus “earnout” shares, and its current share count, in total there will be 177.7 million shares post-merger. At today’s prices, that gives the entity an implied valuation of around $10.3 billion. Putting it simply, that’s too high a valuation to pay for this pre-revenue company.
That’s not to say the platform will flop. As I discussed previously, assuming it doesn’t get blacklisted by big tech and receives widespread distribution, it could become a successful entity. Particularly with its plans to have a subscription-based streaming service.
If just 10% of the 74 million Americans who voted for him in 2020 bought a $10 per month subscription for such a service, that alone is around $840 million in potential annual revenue.
That’s before factoring in the potential ad revenue from the free features of this platform. All told, it’s not a stretch to say this could scale into a high-margin business generating.
One that could generate at least $1 billion in annual revenue, but until more details come out, it’s a little too “priced for perfection” for my taste.
Wait for Another Sell-Off Before Buying
With the hostility and snark seen in coverage of it, it’s easy to write off the chances of Truth Social (the name of Trump’s soon-to-be-launched platform). But even as more Americans dislike him than like him, TMTG could find success as a niche social media and streaming platform.
The issue? It’s probably not one worthy of a $10 billion valuation. Or perhaps a $5 billion one, for that matter. As more information about TMTG and Truth Social becomes known, it’ll be easier to assess a fair price for it today. Until then, wait for the recent bubble in DWAC stock to deflate.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.