By customary investment rules, Trump Media & Technology Group (DJT) should still be privately held. For one, Digital World Acquisition Co., the public company that merged with Trump Media on March 26, had previously hit rocks that would have sunk any other ship. DWAC on several occasions had postponed its scheduled purchase of Trump Media, had been fined $18 million by the SEC and been forced to restate its previous filings, had lost its institutional investors and changed its accounting firm.
Digital World Acquisition Co., the public company that merged with Trump Media on March 26, had previously hit rocks that would have sunk any other ship.
Under normal conditions, DWAC would have ceased to exist. Shareholders in special purpose acquisition companies, as DWAC was structured, have the right to demand the return of their initial investment until that company consummates a deal. (That is what DWAC’s institutional investors did.) Retail investors surely would have treated DWAC similarly, had not its target carried the name Trump.
The news became stranger yet on March 26 when, against the tide, the merger proceeded, permitting Trump Media to become publicly listed. The stock’s closing price of $57.99 valued the company at roughly $9 billion. (Don’t believe any authoritative statement about Trump Media’s stock-market value, because nobody knows what it is due to the company’s complex stock issuance structure.) However, by any rules previously known to mankind, that amount far surpassed what the stock could bear.
Let me explain: In 2023, Trump Media received $4.1 million in revenues. Most news accounts of Trump Media’s financial report emphasized the company’s $58 million loss that year, but that amount of red ink, by itself, isn’t the problem. There’s nothing amiss with losing money to make money. The problem for Trump Media is that its sole operation, Truth Social, is highly unlikely to ever make money. Not only were its annual sales paltry — only slightly above that of a typical McDonald’s franchise — but those sales dwindled as the year progressed. The platform headed in the wrong direction.
Valuing a shrinking $4 million business at $9 billion is the greatest feat of chutzpah I have ever seen in the U.S. stock market, and I think we should stop and consider the magnitude of that statement. Although Trump Media’s stock price has since dropped sharply, the company’s market capitalization remains near $6 billion, which gives the stock a price/sales ratio of roughly 1,500.
Sound high? Oh, yes. When Tesla (TLSA) went public in 2010, with revenues that had increased 17 times over the previous three years, its price/sales ratio was 23. When Google, now Alphabet (GOOGL), went public in 2004, with year-over-year revenue growth of 147%, its price/sales ratio was 14. When Facebook, now Meta Platforms (META), went public in 2012 with a 35% one-year growth rate, its price/sales ratio was 20.
You get the point. Historically, investors have determined that groundbreaking products in new industries are worth about 20 times current sales. Yet, Trump Media commands a price/sales ratio of 1,500 or 75 times higher than its predecessors. If investors valued Trump Media’s IPO like they did the initial public offerings of Tesla, Google and Facebook, then Trump Media stock would be selling at 50 cents per share.
And even that would be generous because Truth Social is not a groundbreaking product and does not operate in a new industry. A better comparison for Trump Media would be turnaround situations like AMC Entertainment (AMC), GameStop (GME) and Blackberry (BB) — the meme stocks of a few years back. As with Truth Social, those companies had stagnant revenues and were operating in mature industries. Their peak price/sales ratios ranged from 5 to 16.
If investors valued Trump Media’s IPO like they did the initial public offerings of Tesla, Google and Facebook, then Trump Media stock would be selling at 50 cents per share.
The point, I trust, is clear. While Trump Media has widely been called a “meme stock,” that is a stock that suddenly has become viral, attracting retail investors who boost that company online. But the label greatly understates the situation. Meme stocks have never been priced like this. They’ve always been much, much cheaper. Trump Media exists outside this world, in a weird and wonderful (at least for the moment) alternate universe.
The question, then, is what are DJT’s investors thinking? The stock may reside in a fantasy world, but those investors don’t. At some point, presumably, shareholders might wish to sell their holdings, at a higher price than the stock now commands. Truth Social’s future cash flows won’t do the trick. Even if the platform manages to turn a profit, it can’t possibly earn enough to justify a $6 billion valuation.
One answer is that Trump Media stock is a political bet. If Donald Trump wins in November, perhaps he can use that position to benefit the company. Betting on CEOs to compete Hail Mary passes rarely pays off, though. Just ask investors who paid up for Tesla in 2021 because they thought Elon Musk would find some way to justify its stock price. (He did not.) That said, of all CEOs seeking investment miracles, only Trump could credibly claim he’ll be the next U.S. president.
The other reason, which strikes me as likelier, is that Trump Media is not really a stock in the traditional sense. It’s a form of club membership. For such buyers, owning Trump Media stock means putting one’s money behind one’s beliefs, by joining other like-minded investors in a cause that is true and just. It is ESG investing — that is, investing in stocks based on environmental, social and governance criteria — for those who despise the ESG movement.
Trump Media was trading at $37 per share midday Tuesday. There isn’t a chance it’s worth that much by conventional standards. The questions for its investors is how long the stock will continue to defy those standards and when it will join the rest of the marketplace in this universe.