Is Trump’s Truth Social 2024’s big shorting opportunity?

Donald Trump’s Truth Social made a rip-roaring start to life as a publicly traded company under the name The Trump Media & Technology Group yesterday.

The stock traded as high as $79.38, valuing it at around $10bn. It closed the day at $58.

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It is being likened to a meme stock in as far as fanatic Trump supporters are clubbing together to buy the stock out of their love for Trump as opposed to the prospect of shareholder returns.

The fundamental argument for shorting The Trump Media & Technology Group is compelling. The company only generated $3.3m in revenue in the first nine months of 2023 and lost $50m.

Last night’s closing price gives Trump’s social media company a price-to-sales ratio of around 2,400x. This is eye-wateringly high compared to another recent social media listing, Reddit.

As Hargreaves Lansdown’s Susannah Streeter details below, there is a monumental disparity between the two in terms of valuation on both an earnings basis and per user.

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“There is likely to be significant volatility ahead as a share buying frenzy among his supporters may wane, and investors dig deeper into the fundamentals. Truth Social now has a market cap of just shy of $8 billion with around 5 million active web and mobile users,” Streeter said.

“By contrast Reddit, which went public last week now has a market cap of $10.3 billion but has 73 million active users, a number that’s steadily increased over the years. The floatation will mean $300 million can be poured into the platform, which is set to serve as a pulpit and willing audience for his electoral sermons but it’s hard to see where growth will come to justify this price tag.”

Trump is locked in for six months. One would think that as this date approaches, traders and investors would sell the stock in anticipation of Trump doing the same at his first opportunity.

But this is the United States we’re talking about. Technology stocks thrive with little attention paid to short-term earnings-based valuations. US markets have the ability to look past any short-term losses to the long-term growth story.

However, the disconnect between Truth Social’s valuation and its peers and the wider market isn’t likely to last for long as traders dive in on the opportunity to short the stocks and take it back down to a more sensible valuation.

In addition, the general operating environment for a new social media platform is challenging given the loyalty users have for existing platforms and the lack of innovation Trust Social offers.

“The site will have its work cut out to compete against more established platforms which keep attracting eyes on screen due to the network effect of already having high numbers of users,” Susannah Streeter said.

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