Experiencing a steep drop at the start of April, it may seem like the dust is settling with Digital World Acquisition (NASDAQ:DWAC). So, should you buy DWAC stock as it drops below $50 per share? Not so fast. The speculative frenzy around it has long since peaked. Shares are moving lower in response to recent developments with the merger target of this special purpose acquisition company (SPAC), Trump Media & Technology Group (TMTG). As more drops in price are likely ahead, it is best to avoid it.
So far, TMTG, which was founded by former President Donald Trump as an alternative to Twitter (NASDAQ:TWTR), has failed to find an audience for its Truth Social platform, even among Trump’s politically conservative fanbase. To make matters worse, Elon Musk’s emergence as a potential acquirer of Twitter calls into question the need for Trump’s alternative platform in the first place. Musk may not be a political conservative. In fact, his personal political views span all sides of the political spectrum.
Yet, if Musk takes it over and makes it more “free speech friendly,” or at least creates the perception of such, confidence in Truth Social’s ability to gain critical mass could take another dive. Yes, Twitter insiders are fighting aggressively to keep Musk from gaining control. But even if Musk fails to take over Twitter and the perception that its current corporate culture carries on, that is not to say we’ll see renewed enthusiasm for DWAC stock. Musk takeover or not, Truth Social could continue to struggle building an audience. With this, it will be hard for the stock to maintain its high implied valuation.
Like I have discussed in past coverage, post-merger, this entity will have 224.7 million outstanding shares. That gives it a $10.5 billion valuation at today’s prices. For the company to sustain this valuation, it needs Truth Social to gain a big audience. More importantly, it needs its planned streaming platform, TMTG+, to gain a massive subscriber base, as well. At least, that is the takeaway from the lofty projections TMTG has presented to investors. More reports of it struggling with Truth Social, or TMTG+, will put more pressure on shares.
So, how much further could shares drop from here? It depends on its progress over the next year in getting out of the pre-revenue stage. The rollout of TMTG+ and a move to a material amount of revenue may help soften the blow. That is, it could prevent a full move down to its original SPAC price of $10 per share. Still, with the prospect of shares experiencing moderate declines from here, there is no reason to buy DWAC stock today. The bubble once surrounding it is now deflating. There is only a slim chance it makes a recovery.
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.
