Investment Thesis
While Donald Trump was convicted in May for falsifying business records related to what is being called a hush money payment, the political fallout has been minimal so far. The former president’s standing in the 2024 presidential race remains resilient, with a small lead over President Joe Biden in swing-state polls. This tepid response can be attributed to the long-publicized nature of the case and the lack of televised proceedings, which left many voters disengaged from most of the details. Many have used Trump Media & Technology Group (NASDAQ:DJT) as a way to bet on the influence of Trump being potentially the 47th US President. I think this is misguided.
The financial implications for Trump’s social media ventures are concerning, particularly the risks of stock dilution. Many would have expected that the conviction would deter investors, but shares had remained surprisingly relatively unaffected, until about two weeks ago.
The dilution risk arises from the need for capital to sustain their businesses along with warrants that were previously promised being exercised. I believe this could lead to the issuance of additional shares that will dilute the value of existing shareholders and provide short sellers with more shares to short.
While Trump’s personal brand has withstood the conviction shock, the financial mechanisms supporting his ventures are under significant strain. In my opinion, investors should be wary of the potential for stock dilution, which could erode the value of their holdings despite Trump’s continued political viability.
Trump Media & Technology, in my view, appears to be overvalued, which presents huge risks for investors. The company’s financial performance has been poor, with a reported revenue of just $770,500 for the March quarter and an adjusted operating loss of $12.1 million.
Furthermore, the stock’s volatility is compounded by the heavy influence of retail traders, whose speculative activities have driven erratic price movements, such as the significant drop following the June 27th presidential debate.
With Trump holding 64.9% of the company, any negative shift in his political fortunes could precipitate further declines. Given these factors, Trump Media & Technology shares seem significantly overvalued, making the stock a strong sell despite Trump’s favorable odds of returning to the White House.
Why I Am Doing Follow Up Coverage
In May, I highlighted Trump Media & Technology as a hold but could be downgraded to a sell if Donald Trump were found guilty in his New York trial. My analysis was centered around concerns of the company burning cash, and their inflated valuation unsupported by traditional metrics like price-to-earnings ratios or revenue growth. A high short interest also suggested market sentiment betting against the stock, though a bullish catalyst could have trigged a bullish move for the stock, such as a not-guilty verdict in Trump’s trial, which could have triggered a short squeeze and potentially bolster the stock price.
Following the guilty verdict in May on all 34 counts of falsifying business records, Trump Media & Technology shares have plummeted by a little under 50%. This highlighted the market’s reaction to the legal outcome and confirmed the bearish outlook I had projected.
With this drop, the financial outlook for Trump Media & Technology has continued to worsen. Since my last coverage, the company reported their most recent earnings report, showing a staggering $327.6 million loss in Q1 2024 and their market cap remaining high (despite this) at over $6 billion, driven more by what I believe to be speculative trading than core financial performance.
The potential for further dilution is a large contributor to my negative outlook. The company’s financial strain may necessitate issuing additional shares, diluting the value of existing holdings and eroding shareholder value further. Considering these factors—poor earnings, substantial losses, and dilution risks—Trump Media & Technology shares now represent a strong sell.
Dilution Is A Big Issue
Trump’s company has been impacted by the issuance and exercising of warrants. The company raised over $105 million through a 12 day exercise of these warrants starting on June 20. Furthermore, the organization anticipated additional proceeds of up to $247 million if all warrants under the registration statement were exercised for cash.
Warrants, essentially options to purchase stock at a predetermined price, directly influence dilution. The warrants issued by the company enable the conversion to common stock at $11.50 per share (10Q). This influx of shares will dilute existing shareholders’ equity, as it increases the total share count without an immediate proportional increase in the company’s intrinsic value. This dilution effect, while it brings in much-needed capital, also decreases the value of each existing share, making it less attractive to investors. Like I mentioned in the beginning of this piece, this will also create more shares that short sellers can short, further putting selling pressure on the stock.
In my previous report I stated that Trump’s company has a high short float, with the short interest ratio now suggesting it would take about 1.19 days to cover all short positions if every trade were a buy-back (vs 1.44 before). Short interest has declined from over 80% before to just 12.62% meaning many of these new shares have not been shorted yet to keep short interest at the proportional short interest we saw before. We could see more downside pressure.
Valuation
Trump Media & Technology appears overvalued on some traditional financial metrics, which makes the stock an unattractive proposition under current conditions. The company’s TTM price-to-book (P/B) ratio stands at 21.51 compared to the sector median of 1.80, representing a 1,097.47% premium over the sector median. Minus a small float before that drove up the stock price, I do not see what compels investors to give the company such a premium over sector median other than Trump’s brand. Trump’s brand here has to make investors money in the long run. Given where current advertising revenue is I don’t see the path.
With revenues and profits proving challenging to forecast, it becomes prudent to rely on the price-to-book ratio for valuation purposes. The company’s anemic earnings further complicate traditional valuation approaches like price to sales or a forward P/E ratio. For the quarter ending March 31, 2024, the company reported a net loss of $327.6 million, showing the company is struggling to generate positive margins. The company’s revenue for the same period was a mere $770,500, down from $1.1 million in the previous year, underscoring slow revenue despite the growing user base and platform engagement.
If Trump Media & Technology were to be rerated down to the sector median price-to-book ratio of 1.80, this would imply a significant downside. Calculating this potential downside involves comparing the current overvaluation (21.51) to the sector median (1.80). Such a rerating could lead to a potential downside of approximately 91.63% from the current valuation, indicating a correction that aligns the stock price more realistically with their underlying book value. I think this is probable over the next year given the impact of any future dilution, volatility due to the election, and further operating losses.
Bull Thesis: Trump Wins The Election
In my opinion the biggest bull case for the stock is if Trump wins the election causing a jump in advertising on the platform (even though we have not seen revenues jump as he became the presumptive Republican Party nominee). For those somehow missing the wall-to-wall coverage of American politics right now, the possibility of Trump winning the 2024 presidential election is real, with recent surveys showing a close race between Trump and Biden. According to most polls, Trump has a slight lead over Biden. Even bettors point to a likely potential outcome in favor of the former president. I provide this observation purely from a business perspective, focusing on the potential impacts of a Trump victory on various sectors (and not to comment on whether I want him to win or not).
In the financial markets, Trump’s win could spur a rally similar to the one observed after his 2016 election, driven by investor optimism about business-friendly policies, benefiting his social media company as well.
However, despite this real probability of a win, I believe that Truth Social will not see a major uplift from a Trump presidency that many expect. Despite the potential draw of a Trump-led platform, I believe overall user engagement and growth on Truth Social have not been sufficient to justify their high valuation. The platform has consistently struggled to attract and retain users, which is critical for the success of any social media venture.
One factor that supports this is that many users will continue to get their news on a potential President Trump through traditional social media outlets like Twitter, Facebook, and mainstream media websites. Even if Truth Social gains appeal, many people will likely see screenshots of Trump’s posts shared on other platforms rather than joining Truth Social themselves. This, I believe, undermines the platform’s value proposition and diminishes the incentive for new users to engage directly with Truth Social.
Takeaway
Since Donald Trump’s conviction, his political persona hasn’t taken a hit. In fact he hold a small lead over President Joe Biden in most polls. However, this is not the case with his platform Truth Social.
Since his conviction, shares have fallen close to 50%. Due to ongoing operating losses with what I believe is no clear path to having revenue jump significantly to allow the company to grow into its valuation, I think further dilution of stock shares is highly likely, negatively impacting the value of shares for investors. While a victory in the 2024 election has the potential to temporarily bump shares higher, I just don’t think this will be enough. The platform already has issues regarding user engagement and growth. Despite all of this, the stock remains severely overvalued. Therefore, I think we will continue to see share prices fall, and I believe Trump Media & Technology is a strong sell.
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