Joe Raedle/Getty Images News

Joe Raedle/Getty Images News

Leaving aside politics and personalities, the merger of special purpose acquisition company Digital World Acquisition Corp. (NASDAQ:DWAC ) and Trump Media & Technology Group is close to bizarre. The current DWAC stock price of $77 assigns an enterprise value of nearly $15 billion to former president Donald Trump's fledgling media company, a company that:

Of course, bulls would argue that investors can't leave aside politics and personalities. Donald Trump still has a massive audience. The frustration of the American right (and, to be fair, some independents and liberals) with 'Big Tech' is very real, and opens a potential market for TMTG going forward. And so it is precisely personality and politics that creates the long-term opportunity here, and it's precisely personality and politics that has driven the short-term gains in the DWAC stock price.

It's a fair argument. The problem is that it's not enough, even assuming TMTG has some success (which is hardly a guarantee). Over the past year, the equity market has reminded investors over and over that valuation matters, and at some point - maybe some point soon - that lesson is going to impact DWAC as well.

The focus of late for DWAC stock has been on Truth Social, a social network that is TMTG's first offering. Truth Social launched on Apple (AAPL) devices last month, and immediately soared to the top ranking in Apple's App Store. But since then, the news has not been nearly as positive.

The launch appears to have seen a number of glitches and error messages. Since then, users (myself included) have been stuck on a waitlist; my own position (oddly 901,016 according to an email, but 981,016 per the app) hasn't moved in ten days. As a result of the delays in actually getting users to the site, those already on the platform have detailed a significant lack of engagement; Trump himself has only posted one 'Truth', as public messages on the platform are known.

Truth Social isn't available on Android devices, or on web browsers. The platform itself, meanwhile, essentially is a clone of Twitter (TWTR), albeit one that is built on open-source code. For now Truth Social essentially is a right-wing version of Twitter, one without basic features such as direct messaging.

No doubt that will change; users will be onboarded and features will be added. But in the meantime, the messy launch appears to have disappointed investors who bought DWAC stock when the launch was announced on Feb. 21.

To be fair, it's not at all guaranteed that the recent pullback is driven by Truth Social's launch issues. Early glitches aren't surprising for a company that is not even a year old. Meanwhile, speculative stocks of all kinds have been hammered in recent trading. Even a smooth launch may not have prevented Digital World stock from being buffeted by broader market winds.

Still, in terms of both the TMTG business and the DWAC stock price, the launch issues have the potential to sap optimism. It's not as if TMTG has its lane to itself; it's competing with anti-Big Tech rivals Gab and Parler, the latter of which saw installs rise around the time of the Truth Social launch. The Trump brand and the Trump presence (should it arrive in force) both offer potential advantages, but only if TMTG can build a platform to capitalize on those advantages.

In the early going, we're certainly seeing reason for skepticism. Recent reports suggest that Trump himself is immensely frustrated as Truth Social has fallen down the app download charts. At the end of the day, TMTG needs to execute, and it needs to grow from zero into a multi-billion-dollar player in the broader media ecosystem. Bulls can rightly claim it's still early going, but they also have to admit Truth Social is not off to a good start.

It's worth repeating: it's early. A messy rollout shouldn't be a surprise. The $1.25 billion being raised in the merger with Digital World Acquisition Corp. and a concurrent PIPE (private investment in public equity) transaction hasn't yet reached TMTG's coffers. (It's not clear who is funding TMTG at the moment.) Short-term issues for Truth Social on their own don't blow up the long-term case for Trump Media & Technology Group.

But there's another, seemingly undercovered, aspect to consider: long-term, Truth Social may not really matter all that much to what (likely) will be TMTG stock. In fact, TMTG has made that point, if quietly so.

Trump Media & Technology Group presentation, November 2021

Trump Media & Technology Group presentation, November 2021

In 2026, TMTG projects $3,665.3 million in revenue. But the company itself only estimates that a tiny fraction of that will come from Truth Social (the darker blue line in the bar chart). 21.1 million monetizable users at annual revenue per user of $13.50 suggests ~$285 million in Truth Social revenue - less than 8% of the projected total.

The bulk of the revenue is supposed to come from TMTG+, the company's planned streaming service. (It's not clear how, precisely, the math works; the streaming figures cited here, of 40 million subscribers at $9 per month, should equal $4.32 billion in revenue while TMTG projects total company-wide revenue of $3.67 billion. But the directional point about Truth Social's contribution still holds.)

This slide indeed gets to the bull/bear argument over DWAC stock. Bears will argue rightly that, right now, there's simply nothing to TMTG as a whole. There's a knock-off social media network built on open source code; revenue projections, but no profit margin consideration; limited public commentary in general (no conference call has been held yet, in contrast to nearly all other SPAC mergers); and almost zero discussion of what TMTG appears to believe will be its primary business.

Indeed, as far as I can tell, the public knows precisely two things about the streaming service: it will be branded TMTG+ (this time copying Disney (DIS), apparently) and it will be run by veteran television producer Scott St. John. In that context, the current ~$15 billion valuation seems excessive, to put it mildly.

But bulls can argue that none of this really matters. TMTG has Donald Trump, it will have $1 billion-plus in cash, and it has a massive opportunity to break the hold of 'Big Tech' and major media companies.

Trump Media & Technology Group presentation, October 2021

Trump Media & Technology Group presentation, October 2021

Ostensibly, that cash and that brand provide a solid enough base for TMTG to figure out the correct angles as it goes, and grow at a rapid clip as a result.

But that bull case seems extraordinarily dicey in the context of what we've seen so far. Again, TMTG is led by someone with no corporate experience at all, let alone expertise in media or technology, and there has been no mention from the company of any other operational executives. The Truth Social launch has been glitchy. Donald Trump - legitimately a key pillar of the bull case - has shown hardly any involvement. The streaming service remains ephemeral.

So far, TMTG's biggest accomplishment has been to target retail investors, not media users. The PIPE investment into TMTG highlights that fact. As Matt Levine detailed at Bloomberg, the terms of the convertible stock sold in the PIPE mimic those of a so-called "death spiral convertible."

PIPE investors, should DWAC stock trade below $56 in the ten days after the DWAC/TMTG merger closes, get a 40% discount to the volume-weighted average price. And, unlike most SPACs, there is no lockup. In fact, the merged company must register the converted shares for public resale immediately after the merger close, or pay 2-6% monthly interest as damages.

Still the important point is that the PIPE here is explicitly designed for TMTG to sell stock to hedge funds at a huge discount, and for those hedge funds to immediately turn around and sell the stock to retail investors at a markup. That's why the conversion price and registration rights are set up the way they are. This is an indirect way to do a big meme-stock offering to retail investors, with some hedge funds standing in the middle and getting a cut.

One point of a concurrent PIPE in a SPAC transaction is to provide financial certainty: SPAC shareholders can redeem, while PIPE investors are committed to providing that cash. But another is to provide some validation to the merger, to have institutional investors with more expertise and better due diligence agree to invest alongside the retail investors usually funding much of the SPAC.

The terms of the Digital World PIPE show that TMTG and DWAC either couldn't find or didn't care to find that validation. The $1 billion raised provides a hugely beneficial risk-reward set-up for the PIPE investors - at the cost of significant dilution to existing shareholders at a price well below where DWAC currently trades.

But there's a hugely important technical problem as well. Here's how the pro forma share count for the merged company will look, based on the investor presentation from November and the $33.60 conversion price for the convertible stock issued in the PIPE:

* - includes 40M earnout shares assuming DWAC/TMTG stock holds $30-plus for 20 of any 30 trading days in the three years after closing

*** - assumes DWAC/TMTG stock trades above $56 for ten days after closing; figure rises if stock dips below that level

What is going to happen when the merger closes is that immediately the float in the stock is going to more than double - at least. (That assumes PIPE shareholders don't get more shares than currently expected, and that existing shareholders are subject to standard lock-up agreements.) Meanwhile, even DWAC chairman Patrick Orlando has pointed to the currently thin float as being in part responsible for the stock's run to this point.

We know lock-up expirations can have big impacts on both de-SPAC mergers and traditional initial public offerings. We also know that the market usually anticipates those movements, rather than simply reacting in real time. And, again, as Levine notes, the terms of the PIPE are set up for its investors to sell immediately. That's in part because of potential volatility, but more importantly that selling alone can push down the price, resetting the conversion price lower and leading to the issuance of even more shares. (Hence the "death spiral" name, though the floor for the PIPE conversion price mitigates that problem somewhat.)

All told, investors can believe in the long-term case here, but they need to mind the short-term risk as well.

To be clear, none of this is to say that TMTG can't grow into a viable, profitable enterprise. It's certainly not to say, as a few have, that TMTG and DWAC are a scam or something close. There's a market opportunity here. Truth Social will, to at least some extent, get past current growing pains. TMTG now is not what it is going to be when there is $1.25 billion in its bank account.

But there are real questions here that aren't just a matter of politics or anti-Trump animus or an inability to look forward. Nunes' role as CEO is strange given his lack of experience; Orlando similarly does not have a social media background. Execution has been off, whether it's with Truth Social or with the wonky presentations (the November deck had one slide that may or may not have shown an actual organization chart, and another that blandly showed the basic structure of a public-facing website for no apparent reason).

If TMTG+ is the big driver, then funding is a huge issue. TMTG positions the streaming service as an alternative to Netflix, and indeed anchored its financial projections in a comparison to that streaming giant. But Netflix has spent more than $40 billion on content just in the last three years (per its cash flow statement). If TMTG+ plans to get to 40 million subscribers - nearly one-fifth Netflix's current global base - it ostensibly will have to spend material capital to do so. $1.25 billion isn't going to cut it. That in turn requires more equity raises and more dilution along the way.

Finally, there's valuation. The pro forma share count of 209.5 million, less the cash raised from the SPAC, PIPE, and warrant exercises suggests an enterprise value of about $14.8 billion. AMC Networks (AMCX) already has 9 million streaming subscribers and an enterprise value below $4 billion. Discovery (DISCA) (DISCK) is a massive existing media conglomerate valued, including debt, at around $25 billion before its merger with the media operations of AT&T (T). Even getting to ~one-fifth the size of Netflix, at that company's current per-subscriber valuation (the highest in the space), would at best suggest TMTG+ is worth $35 billion or so; assign a logical discount to Netflix (owing to scale, lesser content, and lower prices) and the valuation comes down toward the $25 billion range or so.

Investors perhaps can add a couple billion for Truth Social using social media comps, but even so, the fundamentals here clearly suggest that success is priced in. If TMTG hits its 2026 targets, the stock maybe doubles in four years if the company can hit those bogeys without follow-on equity raises. That seems highly unlikely given the focus on streaming: a $9 monthly fee requires a steady supply of original content, which is not going to come cheap.

And, of course, there's a simpler case against the DWAC stock price: Donald Trump himself sold for far, far less. He took ~$8.70 per share from DWAC (including sponsor shares and warrants) for a nearly 25% stake, and sold another 15% of TMTG to PIPE investors for $33.60. Yes, significant capital raises require a discount, but that context alone casts some doubt on the current $77 price.

It bears repeating: valuation matters, and the market is teaching some investors that painful lesson at the moment. Believing in Donald Trump as a politician or a person or a businessman is not, alone, a bull case. That belief doesn't mean that the market can be ignored; that capital raises won't matter; that a business run by a dairy farmer is guaranteed to succeed. This is real money - fifteen billion dollars' worth at the moment - not an election. And looked through that cold lens, it's exceptionally difficult to be anything but bearish on DWAC stock.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.