Headline writers for every paper in America have been proclaiming that Donald Trump is about to reap a staggering windfall from the merger of his social hellscape, Truth Social, with a “Special Purpose Acquisition Company” (SPAC) called Digital World Acquisition Corp. (DWAC).
They’re wrong.
Donald Trump’s much-touted $3 billion stake in this Frankenfirm is a mirage. Notwithstanding the breathless headlines, the merger isn’t going to save Trump or his company.
DWAC is a shell, a phantom, a phony, and the headlines that proclaim that DWAC will flood Trump’s coffers are based on a dumb mistake.
Typically, when people talk about the “valuation” of a company, they’re toting up the value of all the shares. They take the market price of a single share, multiply it by the number of outstanding shares, and you get the valuation or market capitalization.
Trump owns 78.25 million shares, so, by this reckoning (at $43 / share), his holdings are worth roughly $3.4 billion. And that would be a bonanza.
But if the arithmetic is right, the reasoning is all wrong.
To begin with, the share price on which this simple calculation is based is nothing more than a desert mirage glittering enticingly in the distance.
In normal companies, the share price is rooted in past earnings, estimates of future earnings, assets, and all those mundane but essential facts. Truth Social / DWAC’s share price isn’t based on an assessment of the company’s real prospects, its balance sheet and income statements; it’s a phantom conjured by the fever dreams of red-hatted patsies hoping to strike it rich.
Let’s look at some of those mundane facts.
Past earnings: What did Truth Social earn last year? A pittance. And that’s being generous. The Wall Street Journal reports that Truth Social had roughly $3.4 million in revenue in the first nine months of 2023—and lost $49 million for the year.1
Future earnings: A social media company must rely on advertisers to make money. (Membership fees are not, as Elon Musk has discovered, a way to get rich in the social media business.) To get advertisers to advertise, DWAC has to demonstrate that it has lots of users.
The problem: it doesn’t have a lot of users.
There are few good sources for measuring the number of active users on Truth Social. Numbers range from roughly 600,00 monthly users to approximately five million users. (In itself, this discrepancy suggests why investing in a company like this is perilous.)
Five million may sound like a lot, but let’s put this in perspective:
- Facebook has roughly three billion monthly users (that is so say, users who use the site at least once a month).
- TikTok has roughly two billion monthly users.
- Twitter, even its crappy Musk-led incarnation, has something like 619 million users.
In other words, even the most optimistic guesses about the number of Truth Social users suggest that the newly merged company will have, at the very best, less than 0.9% of the users than does Twitter. And Twitter, which Elon Musk bought for the staggering sum of $44 billion, is now reputedly merely $4 billion to $19 billion—and continues to hemorrhage money.
So it’s hard to understand how Truth Social / DWAC, a company that…
- can’t sell much advertising;
- has relatively few users; and
- is run by a guy whose business highlights include bankrupting three casinos, an airline, and a hotel,2 and being held liable for fraud
…is going to be worth more than Twitter. Or for that matter, worth anything at all.
The fundamentals, then, don’t look good. Truth Social has to sell ads; to sell ads it has to have users; and expanding the number of users is a tough sell.
Some will insist that a Trump-backed stock is different. The value lies in the “brand.” There’s a premium for the name, for the association with the man who brought us The Art of the Deal and the Plaza Hotel and Trump Steaks and those endearing little red hats.
But that’s not right.
Now, if shares are actually selling at $43 each, then Trump looks like a sure winner.
But again, it’s more complicated. Trump owns 60% of the stock. He needs cash, and fast. He wants to sell. He can’t, right now; he’s got a six-month window before he can dump the stock. But he is (or his lawyers are) resourceful, and he may get around the restrictions on selling stock.
This is where the arithmetic begins to turn into something else. The number of shares that’s being traded now is small. That means that each sale has an outsize impact on the paper worth of the whole company.
Because such a tiny fraction of shares outstanding are traded every day, the prices are “spiky”—which means that the valuation is volatile as well.
So if a few thousand shares are traded at, say, $55 dollars, it looks as though the company is suddenly worth a whole lot more. Conversely, if a few stocks are sold for $30 dollars, the valuation looks pretty bad–but right now it’s fairly easy to pump up the price.
This is a perfect “meme stock” situation. “Meme stocks” are stocks whose prices go through the roof because a bunch of yahoos on a website tout the hidden value of the company they’re pitching.
The smart (but ethically challenged) people boost a stock that is lightly traded by making outrageous claims about hidden assets or whatever. In this case, it’s something like this: “Trump is a Great Businessman! He is a Stable Genius! He knows how to Make a Deal!”
Suckers pour in, and pay way too much money for companies that don’t actually earn the kind of money—and will never earn the kind of money—that would justify those outrageous valuations.
And the smart-but-ethically-challenged people dump and run.
Only later do the people who poured their life savings into the meme stock come to realize that gravity applies to them, too. And their dreams will hit the ground with a sickening thump.
So, when Trump does start selling, the question is, what will hold the price of the stock up? Not his “brand”: people have to be willing to buy the stock, and some of them will buy whatever this failure of a human being will peddle. But only some.
Most people who would be tempted to buy will pay some attention to the fundamentals, and they’ll come to the conclusion that they can’t take the risk.
What happens when people don’t buy stock that’s for sale?
Yes, that’s right: the price goes down. And when the price goes down, the myth that fueled the high valuations in the first place implodes. (That myth, of course, is the premium that Trump insists his name brings to anything he owns. It’s important to remember that a judge in New York flatly rejected this notion, which is a big part of the reason why Trump owes the State of New York more than $450 million.)
And the bump the stock got from being the cool thing to have turns into a dump.
It will get worse. As Trump realizes he needs to sell even more of his now-devalued shares to meet the demands of his creditors (including the State of New York, of course), he’ll try even harder to sell them to beat the downturn in their value—and the decline in price will accelerate.
Splat. That’s the sound you’ll hear. And we’ll find out that Truth Social isn’t worth $6 and a half billion, just as we found out that that Trump apartment didn’t measure 30,000 square feet.
- Trump bought the Eastern Airlines Shuttle for $365 million, renamed it the Trump Shuttle, borrowed too much, missed an interest payment only a year or so after the first Trump Shuttle flew, and turned the whole fiasco over to his creditors (https://time.com/3988970/donald-trump-business/). Trump also notoriously ran three casinos and the Plaza Hotel into bankruptcy (https://www.newyorker.com/news/our-columnists/donald-trumps-business-failures-were-very-rea) ↩︎