The movie “Dumb Money” depicted a true story of small retail stock investors taking on Wall Street giants using GameStop as their stock of choice in 2021. Through a “short squeeze” play facilitated by Reddit threads and a united front, these investors were able to outsmart the savvy billionaires. Now, three years later, the tables have turned as the focus shifts to Former President Donald Trump and his company, Trump Media & Technology Group (NASDAQ Ticker: DJT). Trump’s net worth has skyrocketed by $3-4 billion in recent weeks, primarily due to his stock transactions. His wealth could potentially quadruple to $8 billion in a span of just one month, demonstrating a stroke of luck and good timing for the former president.
The valuation of DJT stock has raised eyebrows among industry experts, as it exceeds traditional metrics by a significant margin. Trump Media became a publicly-traded company through a SPAC called Digital World Acquisition Corp (DWAC) in September 2021. An offer of $875 million was made to Trump Media, despite being perceived as overpriced based on valuation metrics. The SEC launched an investigation into the timing of the SPAC formation and associated insider trades, adding a layer of controversy to the situation.
Analysing the DJT stock price reveals a significant overvaluation compared to other social media companies. Trump Media’s revenue and growth projections suggest a valuation far beyond the norm for the industry. This inflated valuation may attract short sellers looking to capitalize on a potential drop in the stock price. However, the cost to borrow Trump Media stock is currently at an annualized rate of 550%, making it a risky proposition for short sellers. With Trump holding a majority stake in the company and retail investors driving up the stock price, the situation resembles a potential GameStop II scenario.
Despite the high volatility and intense interest in DJT stock, caution is advised for investors looking to get involved. The stock’s high cost to short and the uncertainty surrounding its valuation make it a risky proposition. Mr. Trump’s significant ownership stake and contractual obligations further complicate the situation. While the potential for a retail trade rally remains, the risk of significant losses looms large for new short sellers. As the stock continues to fluctuate, it may be prudent for investors to observe from the sidelines rather than take on unnecessary risks in a highly unpredictable market.
