Trump Media (DJT -1.99%) has burned a lot of investors since it went public by merging with a special purpose acquisition (SPAC) company on March 26. Its stock opened at $70.90 on the first day, but it now trades at about $33.
Trump Media plunged because it was an overvalued meme stock. Even after its three-month decline, the social media company still has a market cap of about $5.9 billion -- which is more than 1,400 times the revenue it generated in 2023. Most investors would probably balk at buying shares of a company sporting such a sky-high valuation, but is there any hope for this controversial and volatile stock?
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Ambitious growth targets that it missed by a mile
Trump Media owns Truth Social, a social media platform that was launched just over two years ago as an alternative to X (formerly Twitter). It says its goal is to "fight back against the big tech companies" that "curtail debate in America and censor voices."
In a SPAC presentation in November 2021, Trump Media said its revenue could increase from an estimated $1 million in 2022 to $3.67 billion in 2026 -- a whopping 678% compound annual growth rate. It said Truth Social's user base would grow from a target of 16 million in 2022 to 81 million in 2026, and asserted that it would increase its percentage of monetizable users from 5% to 26%. It also said its planned subscription-based streaming video service, TMTG+, would gain 40 million subscribers by 2026, eventually generate most of its revenue, and reduce its dependence on the Truth Social platform.
Those estimates were ambitious, but Trump Media stopped disclosing its growth in active users after it went public. According to the web traffic analytics specialists at SimilarWeb, Truth Social only had 76,463 daily active users in the week of May 19, down from 124,852 in the week ended March 31.
Former President Donald Trump, who owns a 65% stake in the company, only has 7.05 million followers on Truth Social -- compared to his 87.2 million followers on X and 24.8 million followers on Meta Platforms' (META 0.09%) Instagram. Truth Social also hasn't provided a firm timeline yet for the planned launch of TMTG+.
Trump Media only generated $4.1 million in revenue in 2023, compared to its pre-merger estimate of $114.1 million for the year, and racked up a net loss of $58.2 million. In the first quarter of 2024, it generated just $770,500 in revenue and posted a net loss of $327.6 million. That's a grim situation for a company with only $273.7 million in cash and equivalents on its books.
So how can Trump Media be worth $5.8 billion?
Trump Media's stock doesn't have any fundamental support yet, so it could plummet by more than 90% and still be overvalued. However, its stock price is likely being propped up by Trump's supporters, many of whom see the stock as an indirect way to support his presidential campaign and cover his rising legal fees. Its volatility is also attracting a lot of attention from meme stock traders on Reddit's (RDDT 0.15%) WallStreetBets subreddit.
The unpredictable support from those groups makes Trump Media a risky stock to short. That's why only 3% of its shares outstanding were still being shorted as of June 14, even as Chief Executive Officer Devin Nunes complained publicly that short sellers were driving its price lower.
This volatile meme stock will be weighed and found wanting
Warren Buffett's mentor Benjamin Graham famously said: ""In the short run, the market is a voting machine but in the long run, it is a weighing machine." That's precisely what's going on with Trump Media's stock. It might be able to maintain its sky-high valuations for a few more quarters as the 2024 election drives more Trump supporters to its stock.
But looking further ahead, there's no way the company can grow into its current valuations. As we move from the voting phase to the weighing phase, Trump Media's stock will inevitably collapse and crush a lot of speculative traders. It might be a fun stock to trade right now with money you can afford to lose, but Trump Media simply doesn't have a future as a long-term investment.
