On October 20th, Digital World Acquisition Corp. (DWAC) and Trump Media & Technology Group (TMTG) announced a merger agreement to go public via a special purpose acquisition vehicle (SPAC).
We all remember the meme-stock trading frenzies that caused the share prices of GameStop (GME:NYSE) and AMC Entertainment (AMC:NYSE) to skyrocket. Similarly, news of the merger agreement triggered a euphoria that moved the DWAC stock from around $10 to $175 – despitetrading being halted multiple times due to excessive volatility.
It’s no surprise that Former US President, Donald Trump knows how to get attention.
Trump has communicated during his presidency about how networks want ratings and he gives it to them. Likewise, the deal has consistently been in the front-page headlines of every major news outlet.
Trump Media & Technology Group, unveiled its business plans in an investor presentation. The company aims to create a media conglomerate rivalling the liberal media consortium and the “Big Tech”. The ambitions don’t stop here, it plans to operate a streaming service that will air “non-woke” programming and a “TMTG Tech Stack” to go up against Amazon Web Services, Google Cloud, and Microsoft Azure.
There is a big enough market for niche conservative platforms.
Most social networks have a unique identity and people tend to surround themselves with those who share the same beliefs. For a lot of people, this company represents the fundamental support to conservative voices who need a network to support themselves.
Also, let’s not forget about Trump’s brand recognition, huge fanbase, and loyal supporters, which could be large enough to prove to be a gamechanger for these platforms.
As of now, the stock is priced purely on speculation. We have very little idea about TMTG’s business plan – much less its strategy to implement the concepts.
At this point, it’s only a promise of the future, but there is no product.
Moreover, creating an “Us vs Them” narrative will lead to having determined rivals (many of which with very deep pockets), which could further increase the risk of de-platforming.
Finally, “Truth Social” targets a very narrow audience limiting their market size at a stage when the conservative social media space is already overcrowded with services like Gab and Parler.
If the market is too small, then network effects will act as an impediment against it.
SPACs are all the rage these days.
This route is appealing to a bunch of companies. There are clearly some deals, where SPAC investors emerge as winners, as the merged company's stock price soars in the aftermath – like DraftKings (DKNG:NASD) and Iridium Communications investors received staggering returns post-merger with SPAC.
However, the majority of SPAC-merged companies underperformed the (benchmark) S&P 500 returns both in the long and short term.
That being said, SPACs provide a different structure for going public rather than IPOs or direct listings.
Nonetheless, in investing, the future is not always dependent on the past. Fundamentals can change overnight. A few SPACs underperforming should not mask the fact that, by doing away with the banking intermediaries, it provides an avenue to raise capital in a very short time and at less cost.
The market tends to give scalable internet businesses like Facebook, Bytedance (TikTok), and Netflix astronomical valuation multiples – but TMTG does not have any figures that allow us to quantify its position or project its future cash flows.
As a result, TMTG is a pure speculation play – right now, you’re betting only on a vision.
For risk-on investors, that can sometimes pay off handsomely.
But if you’re investing style is more conservative in nature, it might be wise to wait on the side lines for more certainty before jumping on the bandwagon.