Long-Term Potential Is Not Enough to Sustain Digital World’s Valuation

  • Despite what the critics say, Trump Media, this SPAC’s merger target, could become a multi-billion dollar business
  • Still, it is unclear whether it will scale into an enterprise worthy of DWAC’s current implied valuation
  • It is a matter of “when,” not “if,” DWAC stock falls to a price more in line with its fundamentals
the Truth Social logo is seen displayed on a smartphone being held in front of an app store showing the app Truth Social

Source: rafapress / Shutterstock

Bouncing back a bit after its slide earlier this month, shares in Digital World Acquisition Corp. (NASDAQ:DWAC) continue to generate a lot of buzz. DWAC stock, which will become TMTG stock after its special purpose acquisition company (SPAC) merger with Trump Media & Technology Group, has performed well so far this year.

Mainly, this is due to the launch of TMTG’s social media platform, Truth Social. Marketing itself as a conservative-friendly alternative to Twitter (NASDAQ:TWTR) and Meta Platforms’ (NASDAQ:FB) Facebook, it has had a mixed start since its launch in February.

The former President’s critics may be quick to declare it a flop. Even so, I wouldn’t be quick to judge its longer-term prospects. The company will receive a large influx of capital once the SPAC merger closes. This, Trump’s heavy user base, plus this startup’s plans to go into the streaming business, could result in it scaling into a billion dollar business.

The problem? Valuation remains out of whack with this early stage venture’s long-term potential. Sure, a valuation divorced from fundamentals has yet to bring down AMC Entertainment (NYSE:AMC) or GameStop (NYSE:GME) stock. But while it may not happen in the immediate future, all of these names will see their valuations normalize.

DWAC Digital World Acquisition Corp. $69.62

What Bears and Bulls Get Wrong About DWAC Stock

With it being at the unique intersection between America’s polarized political climate and the fading SPAC bubble, Digital World is one of the most interesting stocks out there today.

However, this has resulted in both sides holding extreme views about its long-term prospects. Bears overestimate how badly things will turn out. Bulls are overconfident that this will become a massive media and tech company.

With the bears, there is too much emphasis on Truth Social’s success — or lack thereof — to date. They cite articles that take its sluggish start and extrapolate that this means the platform and the company will be a full-on failure.

Bulls will reference how almost 74 million Americans voted for Trump in 2020. The implication, of course, being that all of them will become Daily Active Users (DAUs) of Truth Social. Like most things in life, the “truth” is somewhere in the middle.

That is bad news for the former President’s critics. It is not set in stone that Trump Media will go the way of Trump Shuttle. On the other hand, even if this company becomes one of Trump’s success stories, it may still not be enough to hold up DWAC’s current valuation.

Not Enough to Sustain DWAC’s Implied Valuation

Truth Social may, for now, have just a few hundred thousand users. But, as it is basically a startup that is going public while still in the pre-revenue stage, Trump Media & Technology could scale into a much larger business than critics assume today.

With the influx of cash it will receive after the SPAC deal closes, it will have $1.25 billion in its coffers. This funding will help it scale up both its Truth Social platform, plus its planned TMTG+ streaming service.

Although I would take financial projections provided in its investor presentation with a grain of salt, if only a fraction of Trump’s voter base became DUAs of Truth Social/subscribers of TMTG+, they could turn this into a billion dollar company.

Again though, the issue isn’t that Trump’s media business will fail to scale. The issue is growing it to a size that lines up with its current implied valuation.

After its merger, the company will have 224.7 million outstanding shares. At today’s prices of around $69 per share, that gives it an implied value of nearly $16 billion.

Bottom Line: It’s Best to Stay Away

It makes little sense to buy its shares at a high multiple of future projected revenue. Especially as management hasn’t even outlined how or when it will become profitable.

Yes, this stock’s inflated valuation could last longer than the shorts can stay solvent. Other top meme plays, like AMC and GME, continue to avoid a full capitulation.

Even so, both names, at some point, will fall to a price reflective of their underlying business. So, too, will DWAC stock. Buying it today is merely a bet that market psychology stays on its side long enough for you to cash out at a profit.

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, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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