PIPE News Doesn’t Change The Story for Trump SPAC Digital World Stock

In past articles, I’ve been skeptical about Digital World Acquisition Corp (NASDAQ:DWAC) stock. As you likely recall, this special purpose acquisition company (SPAC) is taking former President Donald Trump’s social media venture, Trump Media & Technology Group (TMTG), public. Soaring in price after the merger announcement, many are bullish on the prospects of this deal.

A photo of wooden blocks that say SPAC on a folded newspaper.
Source: Dmitry Demidovich/ShutterStock.com

Why is my view on it more bearish? Mostly, because its implied valuation seemed high. At least, compared to comparable conservative media properties. With this, it appeared far-fetched Trump’s platform would become an enterprise worth billions.

That said, does news of it obtaining $1 billion in private funding change the situation? Yes and no. On one hand, raising more money than expected does increase the chances this early-stage venture lives up to the big goal (“take on big tech”) set by its founder. On the other hand, whether this capital raise is favorable to existing shareholders is debatable.

Namely, because of the heavy discount it’s offering to the PIPE buyers. Worse yet, such a large infusion of capital may not be enough to turn it into a formidable competitor to Twitter (NASDAQ:TWTR). Even if it raises billions more, again on dilutive terms, the end result could be worth far less than investors bullish on the stock currently believe. On top of the existing issues with this blank-check company, sitting out is still the best move.

DWAC Stock and its $1 Billion PIPE Funding Announcement

As mentioned above, Digital World/TMTG has obtained $1 billion in private investment in public equity (PIPE) commitments. This of course is positive news. Before, estimates called for the SPAC to raise only $500 million in PIPE funding.

However, it’s questionable whether this news justifies the recent pop for DWAC stock. After tumbling back to $40 per share, following its short-lived meme stock rally from $10 to $175 per share, shares are back above the $50 per share price level.

Why is it questionable? The PIPE deal may help boost the chances that Trump’s Truth Social platform becomes a Facebook (NASDAQ:FB) or Twitter in the making. However, the terms of the capital raise appear unfavorable to existing shareholders.

Per the press release, the securities the PIPE investors are buying convert into common stock at “a 20% discount to DWAC’s volume-weighted average closing price (VWAP) for the five trading days prior to and including December 1, 2021.” This discount could end up being larger, per the downward adjustment terms.

Other Hurdles Remain

Besides the negative aspects of the PIPE capital raise, existing issues are still on the table with DWAC stock. Again, $1 billion will go a long way to helping this startup achieve the former President’s goal of “fighting back” against big tech.

But will it be enough for Truth Social to become another Twitter? TMTG may end up having to raise more money to keep the lights on while it’s scaling up the business. This may result in even more shareholder dilution. Along with this, it’s uncertain whether this platform, once built out, will even attract the number of users needed to make it a widely-used network.

After all, another “free speech” themed platform, Parler, has only 11.1 million cumulative installations. The niche nature of this site (MAGA conservatism) could limit its potential user base. In turn, this points to the platform becoming successful. Just not at a scale that’s enough to sustain and grow its current valuation.

Then again, I could be proven wrong in the end. 74 million Americans voted for Trump. Recent moves by new Twitter CEO Parag Agrawal, perceived by conservative critics as an attack on free speech, could further alienate right-leaning users of the mainstream site, driving them to Truth Social. The former President’s vocal critics are quick to point out his many blunders. Both in business, and in politics. But Truth Social could wind up being one of his unexpected victories.

Bottom Line on This Trump SPAC

Digital World could continue to bounce back in the near-term. Excitement over its PIPE deal may keep it trending higher. If the regulatory scrutiny it’s facing now passes, investors may have more reason to bid up the stock. However, while it may make for a great meme trade, it may not work well for investors with a longer time horizon.

The PIPE deal is dilutive to existing investors. It may also not be the last time the company slices the pie into many more slices, via a capital raise. Also, existing concerns are still on the table. This platform could wind up becoming much smaller in size than the market currently expects.

So, with its appeal as a long-term investment still questionable, what’s the best move? Continue to hold off on DWAC stock.

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.


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