Trading the Trump Meme Stock

Brace yourself…

Donald Trump’s Truth Social is now a publicly-traded stock following its merger with a SPAC earlier this week. 

Look, I’m not going to tell you what to think. Here at The Freeport Society, we believe in freedom of thought… and I for one hate being lectured. 

I’m also certainly not going to tell you how to vote. That’s your decision, and it’s none of my business.

But I am going to give you the truth on Truth Social’s new stock, Trump Media & Technology Group (DJT)… and some advice on how to trade it if that’s what you want to do. 

Here’s the most important thing to do…

Stay Emotionally Detached

First, stay detached. The biggest mistake you can ever make as an investor is to get emotionally attached to a stock. No matter how much you love a stock, it will never love you back. And no matter how much you might hate one, it will never give you the courtesy of caring. 

So, before you trade a single share, be honest with yourself about why you’re buying or selling it.

I love Krispy Kreme donuts. I bought a few shares purely for sentimental reasons… because I thought it was kinda cool to own a few shares of my favorite donut company. Were the Spoetzl Brewery, the maker of my beloved Shiner Bock beer, a public company, I’d do the same. Likewise for Whataburger, my late-night bad burger habit. 

But these are not real investments for me. They’re not even trades. They’re more like metaphorical baseball cards I pull out of the box from time to time for the sake of nostalgia. 

If that’s how you feel about Trump Media, then you do you. My only advice would be to keep your position size modest  and accept these are wildly risky shares with a very possibility of dropping to zero. 

Here’s why……

What Are You Buying?

It’s hard to know what exactly it is you’re buying here.

Trump Media didn’t go the normal IPO route. It went public by merging with a SPAC, also known as a “blank check company,” which generally means less regulatory scrutiny and fewer disclosures to would-be investors. 

In the company’s own SEC filings, it made this abundantly clear, saying: 

We have not obtained an opinion from an independent investment banking firm or another independent firm, and consequently, you may have no assurance from an independent source that the terms of the Business Combination are fair to our stockholders from a financial point of view.

The process of taking a company public by means of a business combination with a special purpose acquisition company is different from taking a company public through an underwritten offering and may create risks for our unaffiliated investors. You may not have the same benefits as an investor in an underwritten public offering.

None of its executives have any experience building a successful social media company. 

Its financial statements aren’t audited. 

And the company has been really stingy about reporting any data at all on its users. 

SimilarWeb, a third party, estimates that Truth Social had 5 million monthly website visits in February and around 1 million monthly active users. To put that in perspective, Twitter had over 200 million monthly active users when it went public, and it still struggled to turn a profit. Facebook had over 800 million monthly active users when it went public. 

Let’s talk dollars. 

Truth earned $3.4 million in revenue in the first nine months of 2023 and it lost around $49 million. It’s a long way from profitability, and it’s not clear how the company will ever reach profitability without first getting its user numbers up. The user base just isn’t large enough to warrant advertising to… and it’s hard to see many major corporate advertisers being willing to risk alienating half their customers by being associated with the brand. The risk just isn’t going to justify the reward for most. 

Beware of Motivated Sellers

There’s one major glaring reason to be wary of Trump Media…

The former president himself owns about 60% of the shares, and it’s no secret that he’s in the midst of a cash crunch. He recently posted a $92 million bond related to the judgment in the Jean Carrol defamation case. He’s also on the hook to post another $175 million bond related to his New York fraud case. But if he loses those cases on appeal, he’ll have to pony up over half a billion dollars in judgments, and the potential amount grows by the day due to interest. 

Also remember that Trump doesn’t run Truth Social. He’s the biggest shareholder and its most high profile user. But the company loses money, it’s competing against entrenched competitors, and its executives have no real experience successfully running a social media company.  

Trump has every incentive to take advantage of the wildly inflated stock price and dump his shares as soon as he’s legally able to (in theory, six months from now, but the board of directors could accelerate that if they wanted to). I certainly would if I were him. 

Traders are like sharks sniffing blood in the water. If even a whisper gets out that Trump himself is unloading shares, they will mercilessly get in front of him and short it. You don’t want to be anywhere near the shares in a scenario like that. 

I’m never going to tell a trader not to trade. If there’s action in a stock, then there’s potential to profitably trade it, long or short. 

If you want in on the action in DJT, then by all means, trade it. Meme stocks can be an absolute blast. Investors who timed the GameStop Corp. (GME) short squeeze right made hundreds or even thousands of percent returns. Of course, those that stuck around too long eventually saw those gains evaporate, and plenty lost their shirts.

Just be smart and trade DJT stock the way you would any other position. Don’t let your love of Trump encourage you to hold on longer than you should, or don’t let your hatred of the man encourage you to be reckless in shorting it. 

And if you can’t stay emotionally detached… it’s better to just walk away. 

In The Freeport Investor, we don’t put politics in front of profit. We consider environmental, social, and governance-based investing (ESG) to be one of the stupidest trends in the centuries-old history of the stock market. 

The purpose of investing is to make money, not to engage in virtue signaling. I’d apply the same logic to Trump Media & Technology Group.

To life, liberty, and the pursuit of wealth.