When an unstable company is tied to an unpredictable leader, the results can be disastrous.
Digital World Acquisition Corp (NASDAQ:DWAC), the blank-check partner of Truth Social parent the Trump Media & Technology Group (TMTG), has finally snapped its losing streak. After months of trading sideways, DWAC stock has surged almost 140% since the year began. Thanks to Donald Trump’s 2024 presidential campaign, the special purpose acquisition company (SPAC) is in full focus. To the untrained eye, this wild trading might suggest that one of Trump’s business ventures is actually succeeding, as DWAC stock has certainly been performing well. But investors shouldn’t ignore the significant risks that come with ties to Trump. As it stands, they don’t justify any potential rewards.
Digital World is nothing but a blank-check company. It hasn’t completed its planned merger with TMTG yet due to extensive complications that include multiple regulatory probes. Recent price action in DWAC is all thanks to the election-fueled focus on Trump, the Republican frontrunner.
Whether or not the stock goes to the moon or comes crashing back down to earth will largely depend on Trump’s political future. And as he falls short of polling expectations, betting on him looks increasingly risky. The same can be said for DWAC stock, even as early election momentum pushes it up.
Donald Trump Makes DWAC the Election Stock of 2024
DWAC stock shocked the financial world with news of its planned merger with TMTG on Oct. 21, 2021. For fans and investors alike, it brought a chance to profit from the renewed focus on Trump as he geared up to launch his social media venture following his 2021 ban from Twitter. With the completed merger, they would have the chance to bet directly on Truth Social, as well as other assets under the parent company TMTG.
But over two years later, the merger is still hanging in the balance.
Both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have launched investigations into Digital World since 2021. The agencies asked for information regarding communications between Digital World and TMTG prior to the announcement of the merger. The SEC expanded its investigation in June 2022, further compromising DWAC stock.
Then, in July 2023, it charged DWAC with “failing to disclose that it had formulated a plan to acquire and was pursuing the acquisition of TMTG prior to DWAC’s IPO.” The combination of the multiple probes into both companies and concerns over Trump’s legal problems have led to the merger facing continuous delays.
As the process has dragged on, the company has been forced to return hundreds of millions of dollars to investors, signaling further distress.
DWAC Stock Is a Troubled Election Stock With a Dubious Partner
Roughly four months after the DWAC merger announcement, Truth Social formally launched on Feb. 21, 2022. The app came with substantial glitches, and many users reported being stuck in limbo and unable to sign up. In the month after the launch, downloads fell by 93%, and two of the platform’s top executives resigned, offering little context for their swift departures. Before the end of 2023, New York Magazine summarized the troubled platform’s turbulent year, stating, “Trump’s Truth Social is an unmitigated failure.”
DWAC shares largely failed to turn heads again until Jan. 12, 2024, when Trump clinched the victory at the Iowa caucuses. Shares have continuously rallied after his primary victories and when challenger Ron DeSantis dropped out of the race. However, DWAC stock fell on Wednesday, March 6, following Trump’s significant victory on Super Tuesday.
There’s no denying that DWAC has earned the title of this year’s “election stock,” as no company is closer to a presidential candidate.
As Matthew Tuttle, CEO and CIO of wealth management firm Tuttle Capital Management, notes, its connection to Trump is everything for DWAC stock. “Right now it’s the election stock. Good news for Trump, good news for the stock.”
But investors should be careful to see the bigger picture when it comes to DWAC. If Trump does not win in November, his loss will erase all the stock’s progress.
The fact that Digital World’s only catalyst is Trump should remind investors that its recent price action is highly speculative. And as Dan Bustamante, CIO of Bustamante & Co, emphasizes, speculative trading comes with substantial risk:
“[Investors] should be approaching [DWAC] with a speculative position at best. I don’t think it should be something that’s more than 5%-10% of their portfolio because it’s predicated on the fact that he’s going to win. … If there’s a chance that he doesn’t win or something happens with the company, I think the downside risk is too great.”
Betting on a Meme or a Presidential Candidate?
Most DWAC investors seem only concerned with betting on DWAC stock as a means of betting on Trump himself. This could be out of loyalty, but it could also be due to a dangerous groupthink mentality, causing investors to ignore reality.
After years of operating, TMTG has failed to provide a clear business model. The company’s website highlights two other ventures: a subscription video service, TMTG+ and an outlet called TMTG News. However, neither project has been launched, and TMTG has provided few updates on its other planned divisions.
Additionally, Truth Social has lost more than $31 million since launch, prompting concerns of a potential shutdown. While it has managed to remain in business so far, its parent company’s constantly delayed merger has generated understandable concern.
Most recently, two co-founders of TMTG sued the company on the grounds that its leaders, including Trump, had colluded to cheat them out of a potentially valuable stake. At this point, investors in the blank check company should brace themselves for a failed merger.
In an amended S-4 form filed on Feb. 14, 2024, Digital World outlined the risks that the former president may pose to its growth prospects. This included the considerable charges levied against Trump and many other factors that highlighted the company’s strong ties to Trump specifically. This list includes risks such as his potential death or incarceration. However, it also highlights the improper pro forma earnings charges brought by the SEC against the former Trump Hotels and Casino Resorts. The original Trump stock, which had the ticker “TRMP,” crumbled as the Casino company filed for bankruptcy after failing to restructure its high debt burden in 2004.
Trump also controls 90% of TMTG, giving him unmatched influence over the company and its decision-making:
“President Trump will hold at least 58.1% of the outstanding shares of New Digital World common stock, which control limits or precludes other stockholders’ ability to influence the outcome of matters submitted to stockholders for approval, including the election of directors, the approval of certain employee compensation plans, the adoption of amendments to our organizational documents and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.”
DWAC Stock: A Difficult Road Ahead
According to Similarweb, monthly active users on Truth Social have declined 48% since last year, standing at 688,000 as of January 2024 between Android and IOS platforms. Our research suggests these figures might undercount the actual number, but TMTG has chosen not to include MAU figures as part of its corporate filings.
The company argues that providing standard growth metrics “might not align with the best interests of TMTG or its shareholders.” Put another way, it doesn’t want investors to focus on how poorly Truth Social has been performing.
Trump’s political career may be uncertain, but Digital World’s future is not. This stock is headed to the trash can, regardless of whether Trump heads to prison, his Mar-a-Lago estate or even the White House after the November 2024 election. When a company has only one growth catalyst, that should always be a red flag for investors.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
