Is Trump’s Social Media Platform Really Worth $12.8 Billion?
The Rundown - Your weekly SPAC Deep Dive (01/16/22)
Happy Sunday Folks!
Opinion about Trump Media and Technology Group (TMTG) is as polarising as Trump himself, and widely vary based on political affiliation.
For hardcore loyalists, Trump’s newest venture is an alternative to big tech & cancel culture, which has gone at lengths to cull free speech. Skeptics on the other hand believe that the deal is nothing more than a cash grab, with no history, no revenues, and suspect ties to China. Despite such contrasting views, the truth lies somewhere in between.
Reasons to be OptimisticÂ
In theory, at least, there is a large addressable market for Trump’s social media empire. Before being banned across Social Media Platforms last year, Trump had a large fan base, with 89 million followers on Twitter, 33 Million on Facebook, and 24 Million on Instagram.
Assuming that there is significant overlap and that only between 30-40% of the base are hardcore supporters, the platform could see a potential user base of around 35-50 million (for reference, 70 million voted for Trump in the 2020 election). By comparison, Twitter currently has a valuation of $30 billion with 210 million users today, implying comparable valuations of around $6 billion for TMTG.
Critics have been quick to point out that TMTG can’t be valued as a social media company, as it lacks the network effects and that advertisers would be reluctant to sign up in the fear of losing out on a large audience themselves. But one look at Conservative Online Video Platform Rumble shows that both users and advertisers are signing up in droves. Rumble’s average monthly users have skyrocketed from 1.6 million in September 2020 to 31.9 million in March 2021.
Recent reports suggest that Rumble will provide video & streaming services for Truth Social and is also currently negotiating to provide video delivery as part of TMTG’s subscription service TMTG+. Thus, in the future, TMTG+ could act as an all-in-one social media platform for conservatives across the US. With Truth Social set to launch next month, time will tell if Trump and his team can deliver on the lofty expectations set out by Wall Street.
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Reasons to be SkepticalÂ
From its inception, Trump’s social media empire has been plagued by controversies, including cyberattacks, plagiarism, and regulatory checks. In October, a few weeks before Truth Social was set to go into a private beta, hackers gained access to a private version of the site and claimed the handles of Trump and Pence, positing explicit images. A few days later, reports emerged that Truth Social had adopted several design elements from Mastodon’s open-source project. After Mastodon threatened to sue Truth Social, the platform quietly acknowledged the code powering its platform. The plagiarism didn’t end there, however, as Trump’s team seems to have copy-pasted slides for their investor presentation from the internet.
In addition to the bad press leading up to the launch, the SPAC set to merge with TMTG is also facing regulatory challenges. In October, Digital World Acquisition received inquiries from FINRA regarding the trading that preceded the announcement of the merger with Trump Media. Furthermore, in November, the SEC requested additional information and documents, beginning a formal inquiry. Given that Trump’s list of political rivals are extensive, TMTG could continue to face regulatory challenges, even if it is cleared of the current charges.
A History of Suspect BehaviourÂ
Trump’s SPAC Deal has included shady corporations and suspects characters from the very beginning. Digital World’s CEO Patric Orlando (based out of Wuhan) and CFO Luis Orleans-Braganza (the prince of the Brazilian Imperial Family) bought $11 million in shares of the SPAC before the announcement. Furthermore, in a recent disclosure, it was revealed that Orlando had extensive ties to China and was also the CEO of Yunhong International, a SPAC which failed to close out a $7 billion merger with Giga Energy.
The links to China don’t end there, however, as the Sponsor of DWAC is none other than Arc Capital, a Shanghai Based firm that is no stranger to the SEC. In 2017, the SEC stopped three companies backed by Arc from selling shares publicly, citing that these companies may have misstated the nature and scope of their business. Arc is known for backing companies with no revenue, no customers, and no office space (similar to DWAC which is based out of a WeWork in Downtown Miami).
Valuing TMTGÂ
Based on DWAC’s current stock price of $70, the company is worth nearly $9 billion ($2.6 billion equity in SPAC, $400 million warrants & $6 billion to existing shareholders). In addition, Trump and his group are eligible for an earn-out of $2.8 billion if shares trade over $30 a month and a half after the merger. Including the equity with the expected $1 billion in PIPE commitments, TMTG is currently trading worth $12.8 billion. Despite trading at a colossal valuation, the team at TMTG believes that the underlying business is still in its infancy. Management has guided that the company will generate only $1 million in 2022, even after Truth Social acquires 16 million users.
The company expects TMTG+ to be a key driver of revenues over the next few years, with 40 Million subscribers paying close to $9 a month. Even if Trump can reach 40 million customers (a big ‘IF’) at such a price point, the company would still trade at a 5-year forward Price/Sales of 3.5x, making it hard to justify the current valuation (for reference Twitter trades at current P/S of 6.25x, while Meta trades at 8x). One way that Trump and his team could also drive shareholder value creation is by buying revenue and growth outright. TMTG expects to raise over $1.2 billion at a lofty valuation and could use it to make strategic acquisitions (similar to what Rumble did with Locals).
Bottom LineÂ
In an age where social media is dominated by a handful of companies, Trump has pulled off amazing feet to stir up interest and raise a lot of capital in a short amount of time. Despite this, there are several headwinds for the team at TMTG, including regulatory risks, bad press & an uphill battle to acquire users quickly. Even if the company manages to hit its user & revenue targets, the stock seems to be trading at a lofty valuation to consider at the moment.