Former President Donald Trump's digital media company is suffering significant losses. But what makes it any different from other “start-ups” that often struggle to turn a profit for years, even if they do?
There are several reasons.
First, as a summary, Trump Media and Technology Group recently merged with Digital World Acquisition Company in a SPAC. SPACs are often a fringe financial instrument of last resort for large cash injections. The company is listed on the Nasdaq as $DJT, as expected.
An important part of going public is exposing your financial situation to the whole world. TMTG recently filed its first quarterly financial report with the SEC for everyone to see and analyze. The economic media is making a fuss, but the result is that TMTG is incurring huge losses and making almost no profit. Specifically, the company lost $58 million on revenue of only $4 million.
Those who tend to give philanthropy to tech startups that challenge entrenched rivals, regardless of their “mission” or leadership, rationalize that this imbalance is common among early-stage companies with big ambitions. may be observed. And that's true – who can forget that Uber operated at huge losses for years to undermine the taxi industry's business model?
TMTG is similar on the surface, but mainly because you don't make any money. But that doesn't mean the company is a startup poised for explosive growth. He has three reasons for this.
TMTG is not growing. TMTG's main business, Truth Social, has failed to reach more than a few million users. This hasn't demonstrated the kind of traction that a startup needs to show to suggest it's the next big thing, or even anything at all (as others have pointed out, Twitter has At the time of his IPO, it was generating annual revenues of $665 million). Incredibly low revenue numbers tell us that advertisers, who are the only source of revenue, don't want to pay for the viewers that are there. And there's no real reason to expect this to change. TMTG does not have a VC runway. Venture capital is a high-risk, high-reward strategy of sustaining an essentially unprofitable business until something changes and it becomes profitable. This gives startups the freedom to do risky things like overhiring, charging too little, and ignoring potential future “business models”, sometimes permanently. If investors are confident and the product is gaining traction, like Uber, they will pour billions of dollars into the product because they are sure it will ultimately pay off. Probably. But in the current state of instability, Trump would be a risky bet for VCs as well. But that doesn't matter at all. Because TMTG is accountable to its shareholders. Small startups may have to report to a VC master, but they have more discretion compared to publicly traded companies, which have a fiduciary duty to their shareholders. Mr. Trump is TMTG's largest shareholder, owning 60%, but the remaining 40% is closely monitoring violations of this obligation, including fire sales and loans that significantly reduce the company's value. But the point here is that TMTG doesn't have the freedom to throw around cash (it doesn't have any money anyway) and take risks. The basic idea of going public is that other people have a business they want to share, but TMTG is not like that at all.
As a result, $DJT is fundamentally and significantly overvalued, as analysts have already pointed out. There's little chance the company will make a profit anytime soon, let alone a profit commensurate with its stock price and multibillion-dollar valuation. Even in the most optimistic scenario, solvency would be envisioned as a distant goal.
On the other hand, given the personal, political, legal and business woes of major shareholders, there is a very real risk that the whole thing will collapse before the end of the year.
In reality, stock prices have no relation to a company's performance and are essentially “meme stocks” that are arbitrarily priced and possibly manipulated by retail investors.
While this may make a few day traders and short sellers profitable in the coming days and weeks, it's not something that will maintain its value over the long term, especially given TMTG's lack of capital. By the time Trump is able to sell his shares, the company will probably be worth about the same as it is today. The stock has fallen more than 20% since the market opened and is nowhere near its value this morning.