These investors are skeptical about the success of Trump’s new public company

These investors are skeptical about the success of Trump’s new public company

Former President Donald Trump scored a clear financial victory with his media startup, Trump Media & Technology Group. Once the the company goes publicprobably this week, Trump’s participation could bring in more than $3 billion.

But many investors seem to think that the Trump project will fail. Trump startup will go public via merger with Digital World Acquisition Corp. (DWAC), A special purpose vehicle which has been trading since 2021. After revealing plans to merge with Trump’s startup, DWAC stock rose from its opening price of $10 to a 2022 high of $98.

The stock has since fallen back to around $50, and many negative sentiments have yet to be factored into the stock’s price. “There is a huge belief (Trump pun intended) that there will be a significant decline in the stock price in the near term,” Ihor Dusaniwsky, managing director at S3 Partners, said in an email.

THE short interest in DWAC stock– bets that the price will fall rather than rise – account for about 11% of shares outstanding, according to S3. It’s high, but it’s not unprecedented: the average short interest for public companies is in the low Range 3% to 4%although short interest can reach 40% or more if traders believe a stock is doomed.

But there are very few DWAC stocks available to execute short trades on, making it extremely expensive to bet on the stock. This means that high short interest is a strong indicator of a negative view of the company’s prospects. “There is very little inventory available to support further short selling,” Dusaniwsky said. “But short sellers stay in that trade even though they pay more than 200 times the average stock borrowing rate for a U.S. short trade.”

DWAC has essentially become a meme stock, a sort of viral sensation that piques investor interest beyond what the company’s fundamentals usually suggest. This obviously comes from Trump’s notoriety and the fervent belief of some of his supporters in his crusade to “make America great again.”

Many buyers have pushed the price of DWAC higher. individual investors expressing loyalty to Trump himself. But there is plenty of anecdotal evidence that other buyers are betting on a bubble and hoping to sell before it bursts.

“DWAC drops to $2.50 after merger” an investor posted on Reddit’s meme-stock channel, WallStreetBets. Another suggested that anyone who held the shares long term was a “MAGA bag holder” who would end up putting money in Trump’s pocket.

Short sellers betting against DWAC have lost money so far this year, as the stock has risen in anticipation of the merger’s completion and Trump’s re-emergence on the public markets. But there are several reasons to believe that the Trump Company will struggle, and shareholders will suffer, once the company becomes fully public.

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These investors are skeptical about the success of Trump’s new public company

First, the Trump Company’s core business, the networking app Truth Social, is a money-losing niche player that has no obvious advantage over competitors such as X and Facebook, other than l he divisive appeal of Trump himself. The company has little income and has lost millions since its launch in 2022.

Another risk is Trump’s financial stake in the company, which will trade under the symbol DJT, the same symbol as a The Trump casino company that went bankrupt in 2004. Trump will own at least 55% of the combined company, worth at least $3.3 billion at current valuations. But Trump could have a strong incentive to sell stocks to pay legal fees associated with the four criminal cases he is fighting and two civil cases in which he was ordered to pay more than $500 million in penalties and fees.

Trump must wait 6 months before selling shares of the public company, according to the terms of the merger. But that would still allow him to sell shares by October. The company’s board of directors could also deviate from this rule, which seems plausible given that it is made up of cronies of Trump and his son, Donald Jr.

If Trump sells stock in his own company or if investors believe he is likely to sell stock, it would put downward pressure on the stock price, as normally happens when an insider sells. If Trump dumped a large number of shares to raise money quickly, the value of the shares could fall.

The stock price already fluctuates based on news related to Trump’s personal finances. On March 25, a New York court lowered the amount Trump must pay while appealing a civil conviction for business fraud, from $464 million to $175 million. DWAC shares jumped nearly 20% on the news, as it suggests Trump may be less likely to sell his own company’s stock to raise cash. For a publicly traded stock, that represents extraordinary sensitivity to a person’s financial situation and it could easily go the other way if or when Trump suffers setbacks.

A third risk is that Trump, probably the Republican presidential candidate in 2024, loses in November to outgoing President Joe Biden. A second defeat against Biden would leave little political future for Trump, 77, except as a sort of emeritus boss of the Republican Party. Instead of being the ideal conversation venue for Trump supporters, Truth Social would become a holdover from the Trump movement. Trump’s business is certainly a unique way to monetize your political beliefs on the outcome of the 2024 presidential election.

Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman.

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