Blank-check company Digital World Acquisition Corp. (NASDAQ:DWAC) stock gained big over the past few weeks.
Truth Social Network was released recently and quickly got to the top of Apple’s (NASDAQ:AAPL) App Store charts. It’s part of the Donald Trump-led technology company called the Trump Media and Technology Group, which Digital Word announced to merge with.
However, with massive dilution concerns and the uncertainty surrounding TMTGs success, it’s tough to feel excited about DWAC stock.
Despite the technical glitches, the social media platform has gotten off to a stellar start regarding user engagement.
Former President Trump believes his censorship-free platform will give a new home to those who mainstream media companies have shunned.
The long-term growth runway for Truth Social and TMTG’s other media businesses looks mighty interesting. However, DWAC’s valuation is incredibly overblown. On top of that, major dilution is on the cards, post its merger with TMTG.
The Opportunity Ahead
DWAC/TMTG plans to take on Big Tech and its apparent liberal slant. Truth Social is just the start of what the combination wants to achieve in the tech industry.
They plan to enter a range of sectors to challenge the supremacy of some of the biggest companies in the world.
For instance, they plan to foray into the cloud infrastructure space, challenging the likes of Amazon’s AWS and other services.
That seems like a stretch considering the massive resources, brand equity and scale advantages that Amazon (NASDAQ:AMZN) has. DWAC/TMTG doesn’t have the financial resources to make a mark in capital-intensive businesses such as cloud.
The social media space, though, shows the most promise. Post-merger, TMTG will have over $1 billion in cash, enough to finance the initial roll-out of Truth Social. However, it will require a much larger cash infusion and other resources to stay abreast with its competition in the long run.
DWAC/TMTG also plans to enter the entertainment and streaming market. Though an attractive market with an incredible outlook, the industry is highly competitive. It requires heaps of cash to produce content.
From 2021 to 2025, rough ly 46.5% of Netflix’s (NASDAQ:NFLX) budget of $18.92 billion will go towards the production of originals.
Massive Dilution Expected
Similar to other special purpose acquisition corporation (SPAC) arrangements, the share count is likely to increase substantially post-merger as most investors receive new public shares.
Moreover, the company’s private investment in public equity (PIPE) investors will look to push the share price near the merger date.
PIPE investors have agreements to buy convertible preference shares for $1,000 upon the merger’s closure. Additionally, these convertible preference shares guarantee common A registration rights, which are unique to DWAC/TMTG arrangement.
The lower TMTG’s share price, the more shares PIPE investors will receive. Hence, the arrangement is constructed in a way that incentivizes short selling.
PIPE investors will do whatever they can to push the share piece as low as possible to effectively maximize their shares. After the merger concludes, PIPE investors will begin selling off their shares on the market.
Final Word on DWAC Stock
DWAC’s lofty share price can hardly be justified at this point. There’s no clarity around the prospects of Truth Social and Trump Media’s other business propositions.
Moreover, SPACs have had a bleak history of causing undue selling pressure. Hence, with little to no upside at current levels, it’s best to avoid DWAC stock.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
