2024-01-17 18:49:13 ET
Summary
- Digital World Acquisition Corp. surged above $20 following Donald Trump's win in the Republican Iowa Caucus.
- The merger between Digital World and Trump Media & Technology Group, or TMTG, has not yet closed, causing funding issues for TMTG.
- Truth Social, the social media platform of TMTG, has not gained traction and faces competition from other platforms like Twitter/X.
- Digital World stock has no business warranting a current post-deal close valuation of $2.5+ billion.
On the back of Donald Trump winning the Republican Iowa Caucus, Digital World Acquisition Corp. ( DWAC ) has surged back above $20. The SPAC now trades at multi-year highs not seen since the SPAC craze ended years ago. My investment thesis is ultra Bearish on the stock following the big jump in the price and the lack of progress in Trump Media & Technology Group Crop. ("TMTG") turning into a viable media platform as proposed with the original business combination.
Source: Finviz
Business Combination Closing Struggles
The calendar has already turned to 2024, and the Digital World SPAC still hasn't closed the merger with TMTG. The business combination has now taken so long that Digital World cancelled the $1 billion PIPE deal reducing the funding available to the social media platform needed to compete with media giants in a highly competitive market.
Digital World is now proposing alternative financing via convertible notes of up to $50 million. The convertible notes will pay 8% interest and convert at only $8.00 per share while issuing investors one-half warrant per unit with an exercise price of $11.50.
The trust ended Q3 '23 with a cash balance of $310 million with accrued expenses and liabilities up to $64 million now. The company spent $16 million on legal expenses and operating costs during the September quarter and earned nearly $4 million in interest income, leading to a loss for the quarter of $11 million.
In essence, TMTG would be poised to have ~$300 million in cash to fund operations and build the likes of Truth Social into a viable social media platform, assuming shareholders don't redeem outstanding shares when the business combination is finalized. The platform once thought over $1 billion was needed to build TMTG, and fellow SPAC Rumble Inc. ( RUM ) recently slumped to $3 due to competitive threats from Twitter/X and fears over the ongoing cash burn.
The other main issue is that the business combination was agreed back in September 2021 and the merger hasn't been completed yet. Back in September, shareholders voted to extend the merger extension until September 8, 2024.
If the business isn't consummated, shareholders will get $10+ per share while the stock trades above $23 now following the big Iowa caucus surge.
Truth Social
While the business combination remains a major headache following the SEC issues, the real problem for Digital World is that no indication exists that Truth Social has gained any traction. TMTG hasn't provided any user metrics from Truth Social, and Elon Musk's acquiring Twitter/X has reduced a lot of the benefits from any user or content creator moving to Truth Social to avoid censorship.
TMTG is centered around its social media platform, Truth Social. In an amended proxy statement filed with the U.S. Securities and Exchange Commission back in December, Digital World provided updated financial figures through the Q3 '23 period.
TMTG only reported YTD revenues of $3.4 million with an operating loss of just $10 million. The media company had reported 1H revenues of $2.3, and quarterly revenues appear stuck around only $1.1 million while quarterly expenses have risen to $4.1 million.
Source: Digital World Amended S4
Truth Social was launched in early 2022, and these numbers support the theory that the platform hasn't gained much traction. Statista highlighted how monthly downloads remain paltry, showing no sign the social media platform is scaling unless the company garners more interest in the platform.
Donald Trump recently won the Iowa Republican caucus with 51% of the vote. Ron DeSantis and Nikki Haley split the remaining vote with over 40% of the combined voters.
Digital World soared on the thesis that Trump winning the Republican nomination would make TMTG more valuable. Considering Digital World is already actively controlled by a former President, it isn't clear how such a scenario would make Truth Social more valuable. The President of the U.S. won't likely be able to just disseminate presidential statements on a platform controlled by the President, assuming Trump wins.
Truth Social was launched in early 2022 and the platform has gained very limited traction. In contrast, Rumble has seen revenues soar, with the company announcing a large set of content deals and monetization opportunities.
Even with the much higher revenues of $25 million in Q2 '23 alone, Rumble recently saw the stock collapse to only $3. The problem facing both companies is that reaching scale requires additional spending on technology and monetization tools in addition to content.
Digital World has about 30 million shares outstanding following the initial IPO and will have another 87.5 million after acquiring TMTG for $875 million. Based on the current price, the stock would have a market cap in the $2.5 billion range, with the potential for 40 million earnout shares that would only boost the valuation further, especially with the stock already trading above the top earnout price of $17.50.
Takeaway
The key investor takeaway is that a case can't be made for owning Digital World Acquisition Corp. stock at the current price. Most SPACs have collapsed once the business combinations are complete, and TMTG doesn't have the business to warrant a market cap in excess of $2.5 billion. The stock could trade higher based on the Donald Trump effect, but Digital World just has no legitimate reason to trade for a price above the current liquidation price of around $10 a share.
For further details see:
Digital World: Sell Before It's Too Late