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Sure, it didn’t become a “meme stock” legend like GameStop (NYSE:GME) or AMC Entertainment (NYSE:AMC). But Digital World Acquisition Corp (NASDAQ:DWAC) stock has held onto a pretty nice chunk of its meme-related gains.
Source: Andrew Cline / Shutterstock.com
Last month, when this special purpose acquisition company (SPAC) announced its deal to merge with Trump Media & Technology Group (TMTG), former President Donald Trump’s social media venture, shares shot up as much as 17.5 times within a day of the announcements. Even as the buzz around it wanes, DWAC is still up more than four fold from its offering price, at around $45 per share.
In my earlier take, I talked about the pros and cons of buying it. Not as a “meme trade,” but as a long-term bet on the success of Trump’s new career as a social media impresario. The conclusion? There’s definitely more potential here than his critics give him credit for. But it’s probably not worth its current implied valuation of more than $10 billion.
Taking another look at comparable outlets, its potential value may be far less than I last assessed. With two factors that could cause it to quickly fall down to a value more reflective of its prospects, it’s best to avoid.
DWAC Stock Has Much in the PIPE(line)
So, as talk about it on platforms like Reddit’s r/WallStreetBets has simmered down, what’s the latest with Digital World Acquisition? The SPAC has made known it’s in talks with potential PIPE (private investment in public equity investors).
As you may know, PIPE deals are boilerplate with blank-check mergers. For example, the Lucid Group (NASDAQ:LCID) SPAC deal came with a $2.5 billion PIPE infusion for the EV automaker.
In the case of this company, PIPE investors could end up buying $500 million (or more) worth of DWAC stock. Outside the PIPE news, there have been few updates from the company that help bolster the bull case for it.
Even so, shares have not seen another drop. Quite interesting, given that, unlike AMC Entertainment and GameStop, there doesn’t seem to be a contingent of “DWAC Apes” that are helping it stay strong. Nevertheless, while it may seem like it can hang tight at between $50 and $60 per share, and possibly rise, as TMTG’s flagship platform, social media network Truth Social, launches next year, I wouldn’t bank on it.
Considering the amount of revenue similar conservative media businesses generate? It’s difficult to give this early-stage company a potential value anywhere near where shares trade today.
Truth Social May at Best Wind Up Being a Niche Business
What’s the best case scenario for DWAC stock? TMTG/Truth Social becomes a platform that, even if smaller than major properties like Facebook (NASDAQ:FB) and Twitter (NASDAQ:TWTR), is worth tens of billions of dollars.
However, while I believe this platform stands to become a successful business, what I am doubtful of is whether it becomes something worth $1 billion, much less tens of billion.
First, let’s look at the potential of what I see being its key cash cow: its planned subscription-based streaming platform. Sure, given the size of his fanbase, it’s possible Trump can convince millions to pay $10 per month for his streaming service.
Then again, a similar existing streaming platform, BlazeTV, has only 450,000 paid subscribers. Although more famous than BlazeTV’s personalities, Trump may at best be able to hit this level of paid monthly viewers. At $10 per month, that’s around $54 million in annual revenue.
For the free aspects of the platform? Granted, it’s not apples-to-apples. But considering the revenue generated by outlets like Newsmax (around $128 million), I don’t see this platform getting the traffic needed to generate the billions in ad revenue generated by mainstream social media properties.
Of course, DWAC/TMTG has something else on its side. It will have $293 million in cash, stemming from Digital World’s initial blank-check offering. Plus, potentially another $500 million from the PIPE deal. Nearly $800 million in its war-chest could enable it to become more than just a profitable-yet-niche business. But $800 million in cash, and Trump’s name recognition, hardly warrants such a high valuation, right off the bat.
Bottom Line on Digital World Acquisition
Digital World stock has held onto a large amount of its recent gains. But just like how AMC and GME appear set to one day tank, expect the same with this meme play. Worse yet, it may happen much sooner than with either of the meme stock legends.
A possible renegotiation of the deal terms could cause this to happen. So too, could its post-deal lockup expiration. If it stays above $12 per share after the deal closes, it could end as soon as five months after the deSPACing.
A fair-weather favorite of the meme crowd, with factors that could spark its precipitous decline, steer clear of DWAC stock.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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