The SPAC that’s acquiring former President Donald Trump’s media company is facing a daunting list of negatives as it moves towards closing the transaction.
Real Money Columnist Brad Ginesin outlined the most notable ones recently.
“The problem is that DWAC is trading at an absurd valuation and its stock is highly likely to tank in the coming months,” Ginesin wrote on Real Money. “This is not the right market in which to speculate on an impossible-to-value stock with no earnings, scant revenue, uncertain prospects and buyers solely focused on the company's celebrity appeal,” Ginesin added.
“Yet people foolishly are buying the stock, with a toxic valuation, at precisely the wrong time,” he wrote.
"Last month, Trump Media unveiled its Twitter clone, Truth Social, which was followed by a moment of excitement as the app raced to number one in downloads," Ginesin wrote. "The initial enthusiasm quickly ran its course; now the app's ranking has plummeted, with the media outlet seeing barely any usage. This bodes poorly for the success of Truth Social and anyone invested in Digital World Acquisition.”
Given that Trump's previous media effort 'From the Desk of Donald Trump,' received minimal readership and shut down after 29 days "the status of his appeal is clearly in question,” Ginesin noted.
There’s more.
Since the deal to acquire Trump Media was announced last October, Digital World Acquisition has been highly volatile.
“Part of the enthusiasm stems from the limited number of shares outstanding before the deal closes, which has helped the stock trade at a frothy premium valuation,” Ginesin said. However, “once the deal is consummated, more than five times the current shares will be free to trade, taking the market cap from $3.4 billion to more than $17 billion. Compare that steep valuation to Twitter TWTR, with a $26 billion market cap and more than $5 billion in revenues.”
Hang on, though, there's even more to worry about. "Investors in a PIPE (private investment in public equity) have agreed to buy $1 billion in DWAC shares, free to sell immediately when the deal closes," Ginesin wrote. “The PIPE deal hands these preferred investors a minimum of a 40% discount to the market price with no lock-up agreement. This ought to give pause to any buyer of free-trading stock.”
Oh, and then there's the SEC probe of "possible violations in connection with consummating the deal as well as the trading of the stock." Until the deal does close, "a risk remains that the SEC may uncover an issue that delays or alters the closing process," Ginesin noted.
So, when and if the deal closes "a significant amount of shares will be free to sell with a cost basis far below the current price. Yet investors are buying into nothing more than hope and celebrity appeal – a bad combo as overvaluation and froth are mercilessly rooted out in this market,’ Ginesin said.
In the end, “the stock will likely face significant losses in the coming months.”
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