Here's Why Donald Trump's Truth Social Is Suddenly Worth Billions
In the investing world, it's not exactly uncommon to witness initial public offerings rocket in value when public trading begins. For example, the online chat forum Reddit (NYSE: RDDT) recently made its market debut on March 21, 2024, at a price of $34 per share. By the following week, the stock had fully doubled, trading in the $70 range — though that's since dropped to about $56 at the time of writing. Which brings us to another recent IPO: former president and reality television star Donald Trump's Trump Media & Technology Group (NASDAQ: DJT), a company most famously recognized as the owner of the social media platform Truth Social.
Since its IPO on Tuesday, March 26, 2024, Trump Media, which is virtually synonymous with Truth Social, rallied to a price of approximately $67 by midday on Wednesday. That implies a valuation of about $8 billion for the company, which is calculated by multiplying the stock price by the total number of outstanding shares. Note that Truth Social's share price is perhaps more representative of support from Trump's political base than a true reflection of the company's value. Trump's 60% ownership stake in Truth Social, meanwhile, combined with his previously accumulated wealth, instantly catapulted the former president into a spot on Bloomberg's Billionaires Index, with a net worth of approximately $7.16 billion.
Truth Social is a small fish
Truth Social was initially founded by former President Donald Trump as an outlet for his voice and that of other like-minded individuals after getting booted from conventional social media venues like Facebook and Twitter (now known as X) following the riots in the U.S. Capitol building on January 6, 2021.
In statistics provided to CNN, Truth Social was said to have just 494,000 monthly active U.S. users as of February 2024. For comparison, X, formerly known as Twitter, has approximately 75 million users, while Facebook boasts 142 million. Worse still, those 494,000 Truth Social users represent a 51% year-over-year decline versus 2023. Number of app users aside, the Truth Social website is also experiencing declining views, with 20% fewer unique visitors year over year.
Truth Social's precipitous decline can most likely be explained by the fact that in the years since the January 6 insurrection at the Capitol, Trump's accounts have been reinstated on mainstream social platforms. In particular, Elon Musk's X has grown friendly to displaying right-wing political viewpoints, negating the need for a niche social network like Truth Social.
Truth Social is losing money
Trump Media & Technology Group's massive market cap is particularly perplexing when you consider that the company isn't only losing money — which, to be fair, isn't unheard of for a growing startup company — but its flagship product Truth Social is also losing users. In comments to CNN, IPO expert and finance professor at the University of Florida, Jay Ritter, said, "This is a very unusual situation. The stock is pretty much divorced from fundamentals." Ritter goes on to say that shares of DJT are more likely worth about $2, a far cry from its current $67-per-share trading price.
In comparison to Truth Social, newly IPO'd Reddit has a $6.4 billion valuation that's supported by annual revenue of $804 million in 2023. On the other hand, Truth Social reported annual revenue of $5 million during 2023, yet is valued at about $8 billion. However, revenue and profit aren't the same thing. During the first nine months of 2023, Truth Social reported a loss of $49 million on revenue of $3.4 million.
Is Truth Social considered a meme stock?
In speculative bubbles that sometimes accompany bull markets, stock prices frequently get separated from the accurate valuation of the underlying companies. Investors will purchase shares of a company's stock, even if overvalued, when there's a consensus that said shares can be re-sold at an even higher price later. A subset of that bubble mentality is what's known as meme stocks. That is, stocks that have gone viral and attracted a cult-like following on the internet, leading to an outsized trading volume. Meme stock buyers are frequently smaller retail investors, using popular stock trading apps for beginners, like Robinhood.
During the COVID-19 pandemic era, retailer GameStop (NYSE: GME) emerged as what's widely considered to be the first meme stock. A dedicated online following (ironically, on Reddit) and coordinated buying efforts drove GameStop to a 1,800% increase in value. Other famous meme stocks from that time period included the car rental company Hertz and cinema operator AMC.
This type of behavior begs the question if Truth Social can be classified as a meme stock? Indeed, it has some similarities, such as a coordinated online effort to increase share price. As well, many DJT investors are individuals purchasing small quantities rather than larger institutional investors like hedge funds. However, unlike traditional meme stock pumpers, it could be argued that Truth Social investors are more concerned with supporting Donald Trump financially and politically than actually turning a profit on their investment in Truth Social. That is an important distinction.
Trump can't immediately sell his shares
Certainly, the overnight windfall from Trump Media/Truth Social's IPO could not be arriving at a more fortuitous time for Donald Trump. The former president is currently embroiled in multiple lawsuits, in addition to the expense of campaigning for president again in the 2024 election. Creating billions in wealth over a period of a few days might seem like one serious lifeline to a financially stretched Trump, but turning those paper profits into actual cash won't be quite that simple.
As is typical with many initial public offerings, there's a six-month "lock-up" period during which large shareholders are forbidden from selling shares. This tradition prevents company founders from cashing out early and potentially harming the newly public company, along with the negative optics and lack of confidence that such a move conveys.
That said, lock-up rules have occasionally been waived in the past and Trump Media/Truth Social's board of directors — including Trump's son, Don Jr. — is likely to be accommodating to the former president. If the board green lights Trump to sell shares, there's always the possibility of a shareholder lawsuit, though that too seems unlikely given that many investors are probably Trump supporters.
A potential compromise may surface in the form of Trump being allowed to pledge his shares as collateral for taking out a loan until which time he can access the DJT proceeds fully. In any case, Truth Social's astronomical valuation gives the real estate mogul and former president some serious breathing room at a critical time.