Trump SPAC Digital World: Now Is Not The Time To Invest Emotionally (NASDAQ:DWAC)

Summary

The recent indictment of former President Donald Trump has brought SPAC Digital World Acquisition Corp. (NASDAQ:DWAC) back into the headlines. For those unfamiliar, DWAC announced back in 2021 it would merge with Trump Media & Technology Group, which oversees Truth Social. I posted an article last year when DWAC was trading at $83/share warning investors about the risks of this highly speculative SPAC. At the time of writing, the fully diluted valuation of TMTG was in excess of $10 billion, with little insight into the company’s financial outlook. Since then, shares have fallen more than 80% and I still believe there is more room for the share price to fall. I urge investors to remain cautious and understand the risks before investing in DWAC.

Let’s look at the facts as things stand now for Truth Social:

• The company financials still aren’t fully known: To date, there hasn’t been a ton of transparency around Truth Social’s revenue growth, profitability, or liquidity. We also don’t know how many active users there are on the platform currently.
• The app is currently ranked 30th on Apple’s App Store: Its popularity has undoubtedly declined since its initial launch. I don’t know if user growth will meet future estimates.
• There are regulatory and financial troubles: Insiders say Trump Media could fund itself through September at current spending levels. DWAC also faces legal trouble from the SEC.

Monthly Active Users Could Be Lower Than Initial Estimates

Although we do not have official monthly active user data from Truth Social themselves, estimates from third-party companies such as Forbes, The New York Times, and TheRighting estimate Truth Social has around 1.7-3 million monthly users. This is considerably below where the company estimates its user base to be in 2022 and 2023 at 16 million and 41 million users, respectively. The below table confirms the initial estimates from TMTG’s investor presentation released in 2021:

While we don’t have official numbers from Truth Social, third-party companies have historically been able to track website traffic to get a sense of how the company is doing. If ~2 million active users are correct, Truth Social might face some problems. Using the above assumption of 25% monetizable with an ARPU of $8.90, Truth Social could only be generating around $4.5 million in annual revenue this year. This is without also considering operating expenses and overall profitability. Given its multi-billion dollar valuation, I don’t believe that is justified.

As I mentioned earlier, Truth Social’s popularity on Apple’s App Store has declined quite a bit since peaking at number #1 on Social Networking Apps back at its initial launch. As of April 1st, 2023, it’s ranked 30th in Social Networking on the App Store.

I believe there is a lot of evidence to support the claim that Truth Social will not meet its 46 million user count in 2023. It would need to grow its user base exponentially to hit this target in a short time. What does this mean for the future of Truth Social beyond 2024? There are a lot of unknowns around how and if the social media platform can grow its user base to hit estimates

It’s also very important to understand this because the entire structure of this business deal between Digital World and TMTG revolves around Truth Social meeting its estimates to justify the valuation at the initial $10/share floor price. The company was able to dilute common shareholders and it will be reflected in quarterly filings if or after the merger finalizes.

Conclusion

After the latest developments with Trump’s indictment, there is a lot of emotion right now. It’s understandable, but it doesn’t mean you should make poor financial decisions as an investor in the heat of the moment. While there may be near term rally for DWAC, the long-term prospects for TMTG post-merger contain a lot of uncertainty and risk. Its multi-billion dollar valuation is not justified in my opinion until investors get more information about key financial metrics used by social media companies, such as monthly active users and revenue per user.