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Digital World Stock Could Keep on Winning in the Short Term

In general, meme stocks have had a rough start to 2022, but not Digital World Acquisition (NASDAQ:DWAC) stock.

A 3D illustration of the word SPACs on a stock board full of numbers and up and down arrows.
Source: iQoncept/ShutterStock.com

Instead of tanking, DWAC stock has bolted from the low $50s per share, back up to the high $70s per share.

Why has it managed to move higher, while other speculative plays are under pressure?

It seems excitement over this special purpose acquisition company (SPAC) and its pending merger with former President Trump’s Trump Media and Technology startup, is outweighing market-related factors. This could continue, even as it is still unclear when this transaction will close.

Excitement for the upcoming launch of Trump Media’s main platform, social media site Truth Social may be enough to keep shares steady.

At least until Truth Social’s debut on Feb 21. However, making this a buy-and-hold investment remains questionable.

There are plenty of red flags. At today’s prices, it sports a very high implied valuation. There’s a lot of uncertainty whether this becomes a hit or the latest in a long line of Trump-branded flops.

On top of this, there are other issues (more below) that make this a “cautiously approach” situation.

Why DWAC Stock May Stay Strong Until Presidents Day

At the end of 2021, it may have seemed as if the hype surrounding Digital World was fading out.

Discussion on platforms like Reddit’s r/WallStreetBets trickled to nearly zero.

While it managed to find support at around $50 per share, it was unclear whether it has a path back toward the sky-high prices it fetched in the days following the news the SPAC was taking Trump’s startup public.

Yet over the past two weeks, the anticipation for Truth Social has done far more than kept DWAC stock steady.

Speculators have jumped back into it, ahead of the launch of its merger partner’s flagship platform (on Presidents Day, no less).

Again, up until the day it goes live, speculators could continue to bid it up. Even on indirect positive news.

For example, positive news about the growth of Trump Media’s strategic partner, Rumble (conservative media’s answer to YouTube) sent it up by 14.1% on Jan. 11, with another 11.7% pop the following day.

With this buzz on its side, how far could it climb between now and Feb 21? I wouldn’t count on it making a full move back to its all-time high of $175 per share. Another double-digit percentage spike, though, may be possible.

So, with sentiment on its side and the prospect of this unexpected winner remaining one in the near term, should you buy? Not so fast.

Over the next month, it could move to higher prices, but over a longer time horizon, it’s still at risk of making a sharp move in the wrong direction.

Digital World Could Still Sink Bigly in the Long Term

Betting against DWAC stock could prove painful, depending on how long its current upswing in price lasts. On a longer time horizon, the bearish take on it could prevail, as there’s a lot backing it up.

For one, as I’ve detailed before, the implied valuation of a combined Digital World/Trump Media is high.

At today’s prices, its market capitalization (assuming the deSPACing occurred today) would be more than $10 billion for what’s essentially a startup that hasn’t even launched yet.

A few times in this multi-decade metamorphosis from real estate scion to celebrity developer, to general celebrity, to polarizing political figure, Donald Trump has captured lightning in a bottle several times.

However, Truth Social may end up not being one of those times. Besides the questionable chances that its underlying business becomes successful, much less worth more than $10 billion, there are other risks at hand with shares.

The terms of its private investment in public equity (PIPE) capital raise could be dilutive to holders of DWAC stock.

Insider selling after its lockup period expires (five months after the deSPACing) could also drive it lower prices down the road.

The result could be a move to prices (think $30 or $40 per share) that are far below present price levels. Or worse, a full drop back to its SPAC offering price ($10 per share).

Bullish in the Short Term, Bearish in the Long Term

Although this article has taken a more positive tone compared to my past coverage on Digital World stock, my take on it largely remains the same.

As Truth Social’s launch is what’s top of mind, shares will continue to perform well. Maybe not make another “to the moon” move, but it could perhaps hold steady or move slightly higher.

In the long-term, however, its many red flags could knock it to much lower prices. Weighing these risks against its limited upside (due to its rich implied valuation), there’s still little reason to make DWAC stock a buy-and-hold position.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/dwac-stock-could-keep-on-winning-in-the-short-term/.

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