Trump Stock (DJT) Is Overvalued-But You Might Be Crazy To Short It

Dumb Money was a movie based on a true, David vs Goliath tale, that pitted small, retail stock investors against deep pocketed Wall Street titans. GameStop was the preferred stock of choice. In this story an assembly of small, “naive” investors clobbered the savvy billionaires thanks to a“short squeeze” play utilizing an investments column on Reddit and gutsy resolve among a broad-based contingent. Ultimately, the humbled rich guys, recouped some of their losses, but not without some battle scars, and a few lessons on how to properly track the number of days to cover a short position. It is now 3 years later and the shorts are at it again. This time the stock of choice belongs to Former President Donald Trump, known as Trump Media & Technology Group (NASDAQ Ticker: DJT). In place of the Reddit crowd, we have fervent Trump loyalists who are scattered around the country in mostly rural areas. They love their guy, and unlike most “investors”, may not really care about making money. With a current stock price near $40, DJT sells for a 33% discount to the Trump bible and provides him with more money. It would not take much for this group to rally and cause serious pain to the shorts. As an important note, shorts are exposed to unlimited losses and have a steep entry fee to play their “game”. DJT is shaping up to be another GameStop saga (GameStop II or Dumber Money?). Despite all temptations, this is a good stock to avoid—on both sides. The risk is simply too high.

To be clear, Donald Trump’s name elicits strong emotion—both positive and negative. When it comes to publicly-traded stocks, polarized emotion can either be very good or very bad for a stock price. In the case of DJT, both are on visible display. Irrespective of Trump’s NY real estate holdings, global hotels, TV and book royalties and other miscellaneous business interests, it his recent stock transaction that has become the cornerstone to his total net worth holdings. During the past few weeks his net worth has soared more than $3-4 Billion raising his net worth from $2B to $6B. Moreover, the SEC S4 filings make clear, that if the stock price remains above $17.50 for 20 out of 30 trading days, Mr Trump will receive an additional 36 million “earnout” or bonus shares. Based on recent prevailing stock prices in the range of $45-$50, these earnout shares could be worth an additional $1.5 to $2 Billion. Consequently, his special stock earnout clause will go into effect, unless his stock drops by more than 63% from current levels in a few weeks.

Ironically, just a few weeks ago the former president was under severe financial pressure, with $454 million in fines, penalties and judgements and was seemingly on the brink of default. Now, in less than 1 month, Mr Trump’s wealth has potentially quadruppled from approximately $2 billion to as much as $8 billion. This is an extraordinary turn of events and there are few, if any, on the planet who have experienced a net worth gain approaching this much during the same time period. It all happened precisely when he needed it most and his back was against the wall. Irrespective of whether you love him or hate him, there can be no denying that the former president has been blessed with good timing and luck. Certainly in this case, his fortuitious, sky rocketing stock fortune bailed him out. At least temporarily...

It is worthwhile to examine the underlying components of his recent wealth creation. To most industry observers it is an overpriced facade due to crumble and wreak havoc on those who have supported an inflated valuation.

At the very least, the stock, Trump Media & Technology Group (NASDAQ Ticker: DJT), has exceeded all normal stock valuation metrics. From a traditional valuation perspective, there is no publicly traded company, out of 66,000 publicly-traded companies that we examine on Bloomberg or Capital IQ, that can compare to this stock. To be clear, there is nothing even close.

To properly analyse the DJT stock price, it may be helpful to provide a few background facts of how the Trump Media & Technology Group came to be a publicly-traded company. The story begins with a special purpose acquisition corporation (SPAC) known as Digital World Acquisition Corp (DWAC) that launched in September, 2021. This “Sponsor” company raised $287.5 Million with the intent to later acquire a target company. SEC records show that some controversy surrounded the timing of the offer (strict rule that SPACs could not be formed with the intent to buy a specific target) as well as the timing of some insider trades. But this information regarding impropriety is an important, albeit, side detail in the larger picture.

In the month following the DWAC launch, a Letter of intent (LOI) was extended to Trump Media for $875 Million (total enterprise value of $1.2 billion). The offer was somewhat surprising for a number of reasons. First, the SPAC ownership was created with the help of ARC capital, a Chinese-based company that had a prior history with SEC investigations associated with misrepresenting shell companies. Second, the valuation of the initial offer at $875 Million, was a stretch based on any traditional valuation metric. And third, as discussed above, the timing of the SPAC formation and LOI offer led to an SEC investigation with associated fines/penalties imposed.

Once the target company (Trump Media) accepts the LOI offer to merge with a public SPAC sponsor company, there are many preparations required prior to announcing a public business combination agreement (BCA). At the time of the BCA announcement the sponsor company typically seeks an independent group to provide a “Fairness Opinion” on the offer price to ensure that there is some oversight and protection for the shareholders. The “Fairness Opinion” is submited to the Board of Directors of the Sponsor group, who have a legal obligation to protect the interest of all shareholders including insiders (Class B) as well as public shareholders (Class A). Since there is the potential for a conflict of interest, the BOD seeks a layer of protection from a group of established experts, who ideally possess impeccable credentials, credibility and industry experience. This group evaluates the target company and provides an independent view on the appropriateness of the offer price. Notably, “Fairness Opinions” were not mandatory several years ago when the Digital World Acquisition Corporation first created its SPAC and placed a target price on Trump Media. Nowadays, due in large part to overly optimistic growth projections by target companies undergoing a SPAC transaction, the Securities and Exchange Commission (SEC) is more focused on inflated valuations and target growth projections. To this point, the SEC documents do not disclose that any Fairness Opinion was ever provided for the Trump Media target, and it is highly doubtful that any credible expert would be able to easily justify or support the original $875 Million price ($1.2 Billion total enterprise value).

The valuation of DJT, based on traditional metrics, is a relatively straight forward exercise. SEC documents show that Trump Media expected monthly active user growth ranging from 58% to 33% for the first four years along with revenue growth of 90% to 55%. Importantly, expected enterprise to revenue multiples ranged from 26.8x to 13.3x for years one through five sequentially. To put the valuation in perspective, the enterprise to forward (next period) revenue valuation multiple for other social media companies such as: Meta, Twitter, Pinterest, Snapchat, Reddit or Tencent ranges from 8.0 to 3.6. Trump Media has a TEV (total enterprise value) to Revenue multiple (based on 4/4/24 price) of 984 or 123x to 273x more than other social media companies. This implies that Trump Media (DJT) is currently valued at a massive premium to other well known social media companies . To put this another way, based on the current $3.4 million in revenue and expected growth rate of 90%, they would have approximately $6.4m in revenue for next perod. Utilizing the forward TEV of Meta (8.0), Trump Media would have a market capitalization of approximately $50M. The current market capitalization of DJT (based on 4/4/24 closing price) was $6.3 Billion! This is an approximate overvaluation of 125X. Alternatively, the DJT stock could drop by 99% and still be considered overvalued by current valuation metrics.

This perceived overvaluation may entice some investors to “short” the stock or sell the stock at current levels and then repurchase at a later time (when they believe the price will be at a lower level). But this strategy can go painfully wrong. For those familiar with the GameStop short squeeze saga, consider DJT as a potential GameStop II. Things could get (very) ugly for either side and investors would be wise to simply stay on the sidelines and watch events unfold.

In order to “short” a stock, the short seller needs to “borrow” the stock from an existing long-only investor. For most stocks this is not a herculean task. An investor simply asks his/her broker to short a stock and the broker “borrows” the stock from a willing participant. But Trump Media is no ordinary stock. Whereas the cost to borrow a stock might normally be a few annualized percentage points, the cost to borrow Trump Media is currently set at an annualizedc rate of 550% for existing short sellers. And, according to short sale data provider S3 Partners, new short sellers need to pay as much as 900% annualized interest rate (new record) to short the stock. This implies that for a new short seller, the stock would have to drop by 2.5% per day just to break even!

There are currently 57 million shares in available float (available to trade). Of this amount, 1.67m shares are held by institutional investors (2.9%) and the rest are held by retail investors. There are currently 4.9 million shares currently short and trading volume has been running above 5 million shares per day for the past few days. Unlike, the Gamestop situation a few years ago, there appears to be plenty of liquidity for short sellers to escape within a day, if necessary.

But there are some other issues to address. Mr Trump currently holds 78,750,000 shares (57.6%) before his additional 36,000,000 (potential) earnout shares and given his contractual 6 month lock up, he cannot sell shares anytime soon. Moreover, after Mr Trump receives his additional shares, he will hold 65% of the company, which will be the second highest concentrated ownership percentage of any individual holder with a multi billion dollar company (after Carl Icahn). Finally, the fact that Trump Media (DJT) is a stock that is trading for a value based above $6 Billion, despite compelling data to suggest it is valued far less, demonstrates the power of retail investors to bid a stock up to seemingly unreasonable levels. Although at the timing of this publication (4/5/24), the stock is well off its $71.93 high since its March 26, 2024 DeSpac, it still has the potential for a retail trade rally. The cost to short the stock is 900% on an annualized basis. This is not a stock that an investor can hold for very long without getting burned. Though temptation may suggest that it is easy money to short this stock, the better decision is probably to sit on the sidelines and watch. Nothing good will happen to the new short seller, if many retail investors or even a deep pocketed hedge fund decides to come in strong on the other side.