Near the end of market close on Tuesday, MAGA cable channel Newsmax – which posted a $72 million loss last year – was suddenly valued at roughly $30 billion, more than conservative media stalwart Fox Corporation’s current market cap of $24.75 billion, and making it larger than massive companies like Tyson Foods and Estee Lauder.
Additionally, with share prices surging over 2000 percent following the network’s Monday debut on the New York Stock Exchange, Newsmax CEO and founder Chris Ruddy – the company’s largest shareholder – could count himself among the billionaire class, at least on paper. Following Tuesday’s stunning stock performance, Ruddy’s holdings were worth over $8 billion, according to Bloomberg.
So how does a media company that’s not yet profitable, recently settled a defamation case for eight figures while facing down an even larger lawsuit next month, and is in a slowly dying industry like cable television become the hottest buy on Wall Street? According to investment and financial experts, it’s because it became the latest “meme stock,” and expectations are that what goes up must come down.
“This is like the initial market reaction to DJT on steroids,” Interactive Brokers chief strategist Steve Sosnick told Bloomberg, referencing the surges President Donald Trump’s media company has experienced since it went public.
“This is the newest entry into the pantheon of meme stocks,” he added. “Whether or not that persists, who knows, but it has all the hallmarks of a meme stock. There needs to be some sort of passion to enable investors overlooking fundamentals, and Newsmax fits that bill.”
Throughout Monday and Tuesday, trades were halted multiple times due to volatility as the relatively small number of shares being sold in the offering – less than 8 million – continued to bounce around and soar in price. “Thanks to a combination of a tiny float and a fiercely loyal user base, the stock got moving shortly after it opened,” Sosnick noted.
“Just like any of the stocks that have been [in] momentum play since the meme stock era began, there is a subsection of clients that are willing to put some of their speculative portfolio to ‘catch the wave’ [with Newsmax],” IG North America CEO JJ Kinahan said to Barron’s.
Kinahan also warned that much like Trump Media, which plummeted in value after reaching a peak of roughly $80 a share last year, Newsmax's fundamentals make it a risky proposition. At the same time, there could be a “perception that they may have a ‘favored nation’ status on access to the White House and with that the ability to break stories and get interviews in a quicker fashion than others.”
Over on the trading chatroom Stocktwits, investors celebrated the continued explosion of the stock while calling it the “New GME,” a reference to the popular meme stock GameStop. But, as Bloomberg noted, even GameStop and AMC Theatres – another struggling company that once found itself in meme-buying territory – weren’t being overvalued at a rate that Newsmax is currently experiencing.
Last year, Newsmax brought in $171 million in total revenues, most of which came from advertising. With its share price ending at $235 on Tuesday, the company currently has a price-to-sales ratio of nearly 200. That is well beyond the peak metrics that either GameStop or AMC saw at the height of their meme trading, though it is still far beneath Trump Media. At the time that DJT was trading at its highest price, the ratio was over 2,000.
For comparison’s sake, Fox Corp – which is home to conservative cable giant Fox News – trades at 1.6 times the revenue it brings in. Additionally, Fox News dwarfs Newsmax in terms of cable audience share. Even though it’s experiencing some of the highest ratings in its history, Newsmax still only averages about 200,000 viewers a day – roughly a tenth of Fox News’ audience.
“With about one-tenth the ratings of FNC, one could argue for a value of [some] $2B for Newsmax, or about $16 a share,” investment site Seeking Alpha noted. “The company, though, is less profitable and earns lower advertising revenue given its older demographic and [there’s] likely some hesitance from brands to associate with it.”
Bloomberg also noted that other stocks that have experienced eye-popping debuts like Newsmax have all tumbled back down.
“Just seven other stocks ended their debut sessions up more than 700% after a US IPO in the past five years, delivering returns to well-timed trades. Such firms have been losers in the long run, with shares of the average company in the group down nearly 94 percent from their IPO prices, crashing roughly 99 percent from their respective peaks,” the financial publication reported.
Ruddy, however, feels that the vast over-performance of his company in the initial days of it going public is a testament to Newsmax giving the public what its wants.
“Last election Americans voted against the media establishment and, similarly, investors voted by enormously buying Newsmax stock to say they like us, they value us and they want us to grow,” he said in a statement.
Meanwhile, with Ruddy holding over 80 percent of the controlling Class A shares, which have ten times the voting power of the publicly traded Class B shares, retail investors should also be wary that they won’t have much say in the company’s direction. Ruddy and other key investors are locked in for six months, meaning they can’t unload their shares until this fall.
Additionally, a hefty settlement to Dominion Voting Systems – which pulled in $787.5 million from Fox in a similar lawsuit – could be coming down the pike ahead of this month’s scheduled trial, placing the network at greater risk.
“As we have seen countless times in GameStop (GME), AMC Entertainment (AMC), Avis (CAR), and others, when a stock reaches meme status and has a limited float, the stock can go higher than most imagine,” Seeking Alpha argued.
“However, all of these eventually ended badly, as companies issue shares or fundamentals win out. I expect that to happen here. For now, Newsmax is in the domain of day traders, but investors should steer clear. Even if wildly successful in taking on FNC, fair value is more than 50 percent below current levels, and long-term holders will lose,” Seeking Alpha warned.
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