Is Trump Media Stock Overvalued?

Trump Media & Technology Group (NASDAQ:DJT) is a social media company closely tied to former US President Donald Trump. Following an SPAC merger, DJT began trading under its new ticker symbol in late March.

On the first day of trading, shares almost immediately skyrocketed by 50%. Since then, DJT has been one of America’s most volatile and most closely watched stocks so is Trump Media overvalued, and what can investors expect to see from this high-profile stock?

Trump Media is the parent company of alternative social media website Truth Social. Founded in 2022, Truth Social was originally intended as an alternative to Twitter and Facebook, both of which had suspended the former president.

The platform bills itself as a social media site that is friendly to free speech, presenting an alternative to the oft-cited bias of more traditional sites against those espousing conservative political opinions.

Prices Remain High, Despite Weak Fundamentals

While investors were quick to buy DJT shares after the merger, the company’s 2023 earnings report revealed very thin revenues and large losses. Last year, the company brought in just $4.1 million in revenues while reporting a total loss of $58.2 million.

While it’s far from unusual for growth stocks to trade at high multiples to sales, DJT goes far beyond even most high-multiple shares. With a market capitalization now in excess of $6 billion, Trump Media trades for around 1,500 times its trailing 12-month revenues.

Due to the sky high price DJT stock trades at, observers have been quick to draw parallels to the meme stock phenomenon of 2021. To some degree, the comparison is an apt one.

Like AMC and GameStop, the price of Trump Media appears to have little connection to the underlying performance of the business. Instead, the stock seems to be moving on pure market enthusiasm that could produce rapid gains and equally fast losses.

Prices Have Already Corrected Significantly

It’s worth noting that investors haven’t been blind to the company’s losses. Due to the poor 2023 report, DJT has lost nearly 35% over the past five trading days.

At the close of trading on Friday, April 5th, shares of the social media company bottomed out to a new post-merger low of $40.92. The trend continued the following week and the price of the shares is so high that an attractive entry point doesn’t appear likely in the near future.

It’s interesting to note that institutional investors have taken little interest in DJT, potentially a further sign that the stock is too pricey for smart money to bet on.

Institutional ownership of Trump Media stands at less than 3%. Donald Trump personally owns a majority stake of 57.6% in the company, while the remaining shares are owned by retail investors.

The Bull Case

With shares gyrating wildly and the company is seemingly burdened by unsustainable losses, it’s important to understand the bull case that is keeping some investors in DJT shares.

To begin with, 2023’s revenue represented a large improvement over the $1.5 million it reportedly brought in in 2022. Sustained revenue growth of this sort may well become the company’s saving grace, though it would have to demonstrate an ability to maintain such high growth rates over several years.

As with the meme stocks it is frequently compared to, DJT has attracted the attention of speculative momentum investors. Short-term trading activity was in large part responsible for the sudden surge in share prices when DJT first went public.

For those trading the stock for its momentum, the upward price pressure has little to do with the fundamentals of the business itself.

On some level, it’s also worth considering that buying activity in DJT shares may be driven by the former president’s supporters using the stock as a means of expressing their political positions. This could add to the stock’s already hefty risks because such buyers are likely not looking at Truth Social’s financials per se when making their investment decisions.

Is Trump Media Overvalued?

Barring radical improvements in its performance, especially with regard to revenue, Trump Media appears to be heavily overvalued at current prices.

The stock’s massive price-to-sales ratio alone likely makes it untenable as an investment, as it would take years of extremely strong revenue growth to make sense of the company’s current valuation.

DJT’s current valuation also seems to be undermined by its small user base. Truth Social is estimated to have only about 1 million active monthly users. For reference, Facebook and Instagram parent company Meta reported a monthly user base of 3.1 billion across its family of apps at the end of 2023.

This speaks not only to the very high valuation assigned to DJT’s users but also the sheer competitive advantage that dominant social media platforms have over the fledgling company.

One concern for investors is that a key demand driver for Trump Media was the perceived oppression of free speech on other platforms, though these worries have been somewhat assuaged following Elon Musk’s acquisition of Twitter, now X.

Where rivalry does exist, Trump Media must contend not only with X but also the upcoming relaunch of Parler, a similar platform to Truth Social.

Further concerns stem from the likelihood that bullish momentum is in fact spurred on by buyers who are snapping up shares more as a signal of their support for Trump than the merits of the financial statements. Moreover, an election loss in 2024 as well as further legal troubles for Mr Trump are likely to spill over to affect Trump Media share price.

DJT has the hallmarks of being a highly speculative investment that is substantially overvalued based on the financials. When the speculative aspect of trading is combined with the unusually high level of political risk and dependency on government contracts, the valuation seems to be excessively high and doesn’t match the fundamentals.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.