Former President Donald Trump’s Truth Social app is now live as of Feb. 20. Its special purpose acquisition company (SPAC) merger with Digital World Acquisition Corp (NASDAQ:DWAC) now has an astounding $18.4 billion market capitalization on a pro forma basis. This is as a result of a huge spike in DWAC stock to $95.15 as of March 2.
Once the merger closes later in 2022 with TMTG, the parent company of Truth Social, DWAC stock will have this huge market cap. Obviously, it assumes that the app will be able to pick up tens of millions of users. This is based on the company’s original slide deck.
Truth Social / DWAC Market Cap
Page 5 of the slide deck shows that there will be 193.4 million shares outstanding, even before any insider warrants. So, if we multiply $95.15 by 193.4 million, we get a pro forma market cap of $18.4 billion.
However, after warrants, which are now likely in the money, the number of shares could exceed 200 million. That would raise the pro forma market capitalization to slightly over $19 billion.
The key question then is will DWAC stock be worth this price? Will Truth Social be able to attract enough users to bring in enough ad revenue to justify this huge valuation?
Projecting the Value of TMTG Stock
At the end of the slide deck on page 38, TMTG and DWAC project out the number of “monetizable users,” as well as revenue for 2022 through 2026.
For example, it shows that in 2023 and 2024, Truth Social will pick up 10.3 million and 14.6 million subscribers, respectively.
Maybe that is possible. Since opening up on Feb. 20, Reuters reports that the site has picked up 170,000 subscribers. And this is with only the Apple Inc. (NASDAQ:AAPL) App store allowing downloads. So far, the Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) Play Store is not allowing downloads.
As it stands, the slide projects that revenue for 2023 will hit $114.1 million and $835 million in 2024. That is essentially three years from now. It also implies an rate average revenue per user (ARPU) rate of $57.19.
By comparison, Twitter (NYSE:TWTR) reported that it had 217 million daily monetizable users. Since it produced revenue of $5.077 billion in 2021, that implies that its ARPU was around $23.40.
In other words, DWAC and TMTG assume their ARPU rate will be twice as high as Twitter (i.e., $57 vs. $23). That is probably a very heavy stretch. There is no way to know whether this assumption will be valid.
Another way to realize how high the valuation has become is to divide its pro forma market cap by the forecast sales three years from now. So, take $19 billion and divide it by $835 million (the 2024 projected revenue). That is a price-to-sales (P/S) multiple of about 23 times.
By contrast, Twitter stock trades for 3.76 times 2023 revenue projected by 35 analysts on Wall Street, according to Seeking Alpha.
Where This Leaves DWAC Stock
In my last article on DWAC stock, I referred to one astute Seeking Alpha author who recently pointed out dilution issues. In his article, “Why DWAC Might Decline 60% Post-Merger,” he said that DWAC stock will have severe dilution issues.
Between the high stock price, its high valuation, and its dilution issues, DWAC stock (TMTG after the merger) could fall. But for the time being, investors might be impressed with every higher subscriber announcement by the company.
So, this leaves us in a paradox. The stock doesn’t deserve to go up any higher, but it is likely to do so in the short term as more catalysts appear, including the merger. I would not try to short the stock now or even buy puts on it yet.
I suspect that this will be a “buy-on-the-rumor” and “sell-on-the-news” type situation. When the company closes its merger with TMTG later this year and we have a better idea of its total subscriber base, look to sell the shares then.
On the date of publication, Mark Hake did not hold (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.
