DWAC - Digital World Acquisition: Why Trading It In 2024 May Make Sense

2023-12-05 00:05:18 ET

Summary

• Digital World Acquisition Corp. is a special-purpose acquisition company merging with Trump Media & Technology Group.
• TMTG aims to prioritize free speech through Truth Social and TMTG+ but raises questions about its success in the competitive social media industry.
• DWAC's objective is to raise capital and merge with TMTG. However, delays occurred, leading to DWAC's announcement in October 2023 that it would return approximately $1 billion to investors.
• Despite challenges, DWAC's short- to medium-term performance appears tied to Donald Trump's political moves in 2024, making it a key catalyst.

Digital World Acquisition Corp. ( DWAC ) is a publicly traded special-purpose acquisition company in a merger agreement with Trump Media & Technology Group (TMTG). The stock gained attention after experiencing an 800% surge in share price in October 2021, primarily attributed to its association with former President Donald Trump.

TMTG's primary mission is to protect the First Amendment, prioritizing free and democratic speech in America. The company operates two main segments: the social network Truth Social and the streaming service TMTG+. Together, they aim to establish a "non-cancellable" global community independent of major tech companies like Meta, Amazon, Apple, Netflix, and Google.

As a special-purpose acquisition company, DWAC's sole purpose is to raise capital through an initial public offering ((IPO)) and use the funds to merge with TMTG, essentially taking the private company public.

However, several delays occurred despite the initial expectation for the merger to be completed in the first quarter of 2022. By August 2023, DWAC investors voted to grant an extension of up to one year to finalize the TMTG deal. In October 2023, DWAC announced that it would return the remaining $533 million of the $1 billion raised to finance the venture to investors. This move appeared to be a step backward for the prospective merger between the blank-check company and Trump's media outfit.

Towards the end of 2023, DWAC and TMTG are once again apparently progressing toward the merger. An agreement was reached to extend the time for mutual due diligence, with an updated registration statement expected soon.

During the negotiations, Trump's firm secured significant concessions, including six out of seven board seats in the merged company and adjusted targets for earnout shares. The most prominent change is that Donald Trump will control the post-merger business, holding roughly 55% voting power with the creation of a new class of Class B common stock. This indicates a potential personal solid and financial interest in the business.

Given Donald Trump's skill in garnering media coverage, particularly considering his extensive background in the political arena and the nature of Truth Social as a social media company, Trump's acumen emerges as a favorable asset for the company.

Despite the financial aspects, investor sentiment appears to be more influenced by political considerations surrounding TMTG, especially among retail investors. My thesis on DWAC leans more toward speculation about Donald Trump's potential political comeback in 2024. This suggests that Trump's public appeal could drive DWAC's performance, fueled by retail investors and pro-Trump supporters, regardless of its financial fundamentals, at least in the short to mid-term.

TMTG Is on a Tough Business Path

The initial concept behind TMTG is aspiring to create a more open and conservative-oriented social media platform aimed to rival the likes of X (Twitter) and YouTube. However, the social media landscape has undergone significant changes since then. TMTG may be perceived as domestic than X and YouTube's global reach.

The situation is exacerbated by Elon Musk's acquisition of Twitter, which poses a significant challenge to the underlying rationale for investing in DWAC. This is particularly noteworthy as DWAC was established as an alternative to cancel culture—a stance that Elon Musk appears to be actively opposing with considerable force with X.

Advertisers are becoming increasingly cautious about the returns on investment and potential negative impacts on their brand image when advertising on such platforms. X is grappling with major U.S. companies like Apple ( AAPL ), Disney ( DIS ), and IBM ( IBM ) cutting their advertising due to identity-related concerns.

This predicament extends to TMTG and similar businesses. Even FOX News, a conservative media outlet heavily reliant on subscription fees, faces challenges in diversifying ad revenues in prime-time programming despite a substantial cable audience.

There is a genuine question about TMTG's potential for success as a business. Since its launch, Truth Social has seen minimal subscribers and usage, making it challenging to assess the company's performance. TMTG initially projected 41 million users in 2023, with 25% being monetizable and an ARPU of $8.9. However, advertising revenue appears lacking since the launch of Truth Social in early 2022.

In the first half of 2023, TMTG generated only $2.3 million in revenue with an operating loss of $7.6 million. However, these numbers show improvement from the full-year 2022 results of $1.4 million in revenue and an operating loss of $23.3 million.

For comparison, Rumble ( RUM ), considered a close competitor to TMTG, saw its shares trade at $4.6 per share, reflecting a 47% decline from the previous year. Rumble reported $18 million in revenues last quarter, indicating a 63% annual growth, with a loss of $41 million and cash consumption of $60 million in operating losses over the year.

TMTG's potential delay in capitalizing on the conservative social media industry could be significant, given the advanced stages of its competitors. If the merger proceeds, TMTG may receive substantial proceeds, possibly around $300 million, minus transaction costs. TMTG faces the challenge of swiftly executing its strategy to reverse operational losses with capital infusion.

Potential Impact of Trump's Presidential Run on DWAC Shares

Considering the various risks associated with the merger and the challenges faced by TMTG as a business, it appears that DWAC stock trading performance is influenced by Donald Trump's political moves in 2024, making it a key catalyst for short to medium-term movements.

The outlook for the 2024 presidential elections suggests a potential rematch between former President Donald Trump and current President Joe Biden. Statistics indicate that Trump is approximately a 75% favorite to secure the GOP nomination, with Nikki Haley trailing at 18%. Joe Biden has slightly lower odds, standing at 68% as the Democratic nominee.

Examining the odds, the implied probability of Donald Trump becoming the next President of the United States in 2024 is the highest at 42.2%, followed by Joe Biden at 30.7%, Gavin Newsom at 14.3%, and Nikki Haley at 10%.

However, with Trump running for President, the reception of advertisers on TMTG's platforms remains uncertain due to perceived conflicts of interest. While this presents a potential risk factor, it could also attract certain pro-Trump parties to the platform.

The Bottom Line

DWAC is undoubtedly a speculative play, with Donald Trump being the central figure driving hype and momentum in the stock. Therefore, I believe it's not suitable for long-term ownership but rather for trading as a sort of "gambling" component of an investor's portfolio. Considering Trump's favorable odds for running for the Presidency in 2024 and the signs of the merger progressing shortly, these factors could serve as significant catalysts for a short to medium-term upside.

The stock price of DWAC has shown a sustained uptrend since August, consistently remaining above the longer-term SMA 150. Recently, there has been a noteworthy development with the stock price crossing above the shorter-term SMA 50, signaling increased momentum and the potential for a more immediate uptick. DWAC shares rallied 20% during the extended due diligence period between October and November, serving as an essential catalyst. This combination of being above both moving averages suggests a bullish trend, reflecting both long-term strength and recent positive momentum.

Trading below $18 per share, DWAC's technical charts indicate that the moment is neither overbought nor oversold. The RSI has recently risen above the 50 level, the neutral threshold, indicating a possible bounce or reversal. However, the RSI is still below the 70 level, meaning demand has not yet pushed the asset into an overbought condition. This suggests there may still be room for upward price movement before the market becomes overbought.

In a sense, I view DWAC as a potential "meme stock" in an election year with the merger happening, and it seems like an opportune time to ride the early emotional wave. However, when assessing the potential of TMTG's business execution and growth, I observe substantial challenges that may discourage a bullish fundamental thesis.

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