As I recently pointed out, Digital World Acquisition Corp. (NASDAQ:DWAC) has yet to file an U.S. Securities and Exchange Commission (SEC) form S-4. However, the company has recently announced the outlines of its operations through various public announcements. I suspect that DWAC stock is probably at full value now.
We now know more about what former President Donald Trump’s new media startup operation looks like. For example, on Dec. 4, DWAC released a press release showing that it will raise $1 billion upon the close of the special purpose acquisition corporation (SPAC) merger with Trump’s group Trump Media and Technology Group (TMTG+).
By the way, the $1 billion in convertible preferred investors in a private investment in public equity (PIPE) get a pretty good deal. Their conversion price upon the close of the SPAC deal is just $33.60, based on the Dec. 6 filing of an 8-K form with the SEC.
Since DWAC stock is now at $87.64, this implies a huge return for institutional PIPE investors in the DWAC SPAC deal.
The Outlook for TMTG+
Fortunately, based on the 8-K Filing on Dec. 6, we can see what the potential value of the company is. This is because they provided a slide deck with some important financial information that summarizes the final SPAC merger deal.
For example, on page 5 of the slide deck, TMTG provides the final share count once the merger of DWAC and TMTG is complete. It shows that there will be 224.7 million shares outstanding. So, at today’s price of $87.64, the implied market value of TMTG post-close is $19.692 billion (i.e., 224.7 x $87.64).
We can use this calculation, combined with other estimates given in the slide deck, to see what the valuation metrics are for DWAC stock now.
For example, on the last page of the 38-page slide deck, TMTG provides its estimates of revenue for the next five years starting with 2022. Starting with zero revenue in 2022, the estimate is for $114.1 million in 2023, $835 million in 2024, $1.843 billion in 2025, and $3.665 billion in 2026. This is based on subscription services revenue starting with 0.8 million subscribers in 2022, 14.3 million in 2023, and rising to 61.1 million by 2023.
Valuation of TMTG
Therefore, if we divide $19.69 billion by the 2023 revenue estimate, DWAC stock (later TMTG) trades at a forward price-to-sales (P/S) metric of 172 times revenue (i.e., $19.64 billion / $114.1 million). For 2024 its P/S multiple is 23.5 times, and for 2025 it’s 10.657 times.
However, we can’t rely on these out-year numbers very much since they are flimsy projections with no real tether to reality. In other words, there could be a wide variance or standard deviation around these projections. One way analysts deal with this is to provide a present value estimate of future revenue numbers.
For example, using a 15% annual rate to discount future revenue estimates we can determine the future value of the 2025 revenue numbers. It turns out that compounding 15% for four years in the future reduces the value of the 2025 numbers by a factor of 42.8%. In other words, we multiply the 2025 revenue by 57.2% (i.e., 1-0.428) to get their present value.
As a result, the 2025 revenue projection of $1.843 billion works out to $1.054 billion in present value. this means that the adjusted 2024 P/S metric is 18.6 times (i.e, $19.64 billion / $1.054 billion).
This means DWAC stock is at a fair value since 18.6 times revenue for four years in the future (adjusted to present value) is probably a very reasonable, if not high valuation.
What to do With DWAC Stock
So, you can see that at today’s price (Jan. 18, before the market close) of $87.64 per share, DWAC stock (which, post SPAC merger will become TMTG), has a pro forma market value of $19.64 billion. And at today’s price, it has a P/S merger metric of 18.6 times for sales forecast out four years in the future, on an adjusted basis.
I don’t see much upside from here, unless, for some reason, the company has woefully underestimated the number of subscribers that it will pick up. But since TMTG is a startup operation, there is no reason to believe this. Therefore, most investors will find that they will be better off waiting for the stock to move lower before investing.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.