Digital World Acquisition (NASDAQ:DWAC) is a special purpose acquisition company (SPAC), also known as a “blank check” company formed to facilitate mergers. It recently announced that it will be merging with former President Donald Trump’s new media and social networking company, the Trump Media & Technology Group. DWAC stock initially skyrocketed on the news, shooting above $100 per share at one point.
Shares have come back to reality a bit, as they trade closer to $47 now. Still, that’s a tremendous gain from the recent $10 SPAC price. It’s clear that traders see real opportunity in DWAC stock beyond the initial memes and buzz. But can DWAC stock rally once again?
In the long run, there’s certainly a chance.
However, there’s likely a dip on the way first. Here’s why.
DWAC Is Set To Raise Funds
On Nov. 8, Bloomberg reported that Digital World Acquisition is raising funds. The SPAC is meeting with investors to pump a large amount of capital — perhaps north of $500 million — into the media venture.
Terms of the deal haven’t been disclosed, and from the reporting, it seems there are still a lot of open questions. Still, the reports make it seem reasonably likely that something will come to fruition.
This is likely to have a big impact on Digital World Acquisition. In the short run, it’s bad news for the share price. However, longer-term, it will give the media company a lot more money to work with, helping it get its code up to speed. And once the app is fully functioning, there should be money left over to get marketing and branding operations rolling. This should help get the userbase up to a critical mass.
Lucid Motors Provides An Example
You may recall Churchill Capital — ticker CCIV — from earlier this year. That was the SPAC that ultimately merged with Lucid Motors (NASDAQ:LCID).
Churchill Capital stock traded up to $60 at one point when traders were most excited about the upcoming SPAC merger. Then the company announced a private investment in public equity (PIPE) deal way down at $15 per share, which valued Lucid overall at a $24 billion market capitalization. Churchill shares quickly sank from $60 to the $20’s as shareholders digested the news.
In that case, the PIPE deal ended up being a major blow to short-term sentiment. Even so, it allowed the company to raise money on relatively favorable terms. By contrast, most SPAC PIPE deals merely go off at $10, rather than getting a premium. As it stands today, post-SPAC merger, Lucid shares have now rebounded to over $50 each. That’s way up from where the $15 PIPE offering occurred. And traders that bought in the $20s or low $30s following the initial shock are now sitting on big gains as well.
Thinking Through a Digital World Acquisition PIPE
As mentioned, PIPE deals usually happen at the same $10 price as the initial SPAC offering. However, generally, SPACs don’t trade up as high as DWAC stock has, either. In this case, given the obvious market demand for Trump’s media company, it seems it should be able to raise money on much more favorable terms. The idea that it could raise $500 million or more also supports that idea; that’s a large deal by PIPE standards and implies a more generous valuation.
Still, it seems likely that the PIPE deal would go off at a much lower price than the current DWAC stock price. Institutional investors are unlikely to want to pay, say, $50 a share when the SPAC was at $10 just a few weeks ago. So figure the PIPE deal maybe gets done around $20 or $25.
In that case, DWAC stock will probably trade downward sharply in the near-term. Like with Churchill/Lucid before, seeing a sharply lower valuation for the company would startle at least a few holders of the stock. So don’t be surprised if DWAC sells off dramatically when a fundraising effort is finalized. That’d be perfectly normal and expected in this case.
However, getting all that new money in, assuming the deal is reasonable, will be a plus for the long-term investment case. When the SPAC was announced, many people mocked it, comparing it to Trump University, Trump Steaks, or other such endeavors. The implication being that this was a vanity project with little merit to it. Getting institutional investors to pony up $500 million would add a great deal of heft and credibility to the overall venture going forward.
DWAC Stock Verdict
Let’s make no mistake about it: DWAC stock is in danger of a significant near-term sell-off. Shares ran up a tremendous amount following the deal announcement and are due for a breather. An imminent fundraising announcement could be the catalyst that causes a meaningful sell-off.
But don’t panic when it happens.
In fact, if you like what the business is trying to accomplish, that would be the time to take a position. Given the amount of interest in the Trump brand, DWAC stock should have plenty of buyers on hand in coming weeks and months.
Everything is setting up nicely for a rally once the fundraising news is out of the way.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.