Former President Donald Trump’s digital media company is losing money, and lots of it. But why is this different from other startups, which often struggle to turn a profit for years, if ever?
There are two reasons.
First, as a recap: Trump Media and Technology Group recently merged with Digital World Acquisition Company into a SPAC, the infamous financial vehicle that, more often than not, represents a last resort for a major cash infusion. The company is listed on the NASDAQ as, as expected, $DJT.
An important part of going public is revealing your finances to the world, and TMTG recently submitted the first quarterly financial report with the SEC that anyone can see and analyze. The financial press is having a good time, but the result is that TMTG is losing a lot of money and producing almost nothing. Specifically, the company lost $58 million on just $4 million in revenue.
Those inclined to be charitable to a tech startup challenging established rivals—regardless of its “mission” or leadership—might reasonably observe that this imbalance is common among early-stage companies with big ambitions. And so it is — who can forget that Uber operated at massive losses for years in order to undermine the taxi industry’s business model?
TMTG is similar on the surface, mainly in that it doesn’t make money. But that doesn’t make it a startup on the verge of explosive growth. There are three big, clear reasons why:
- TMTG is not increasing. Truth Social, TMTG’s main business, has failed to attract more than a few million users. It hasn’t demonstrated the kind of traction any startup would need to demonstrate to suggest it’s the next big thing, or really anything (as others have pointed out, Twitter had $665 million in annual revenue when it IPOed). The incredibly low revenue numbers tell us that its only source of revenue, advertisers, don’t want to pay for the audience that’s there. And there’s no real reason to expect that to change.
- TMTG does not have a VC corridor. Venture capital is a high-risk, high-reward strategy where basically unprofitable businesses are backed until something changes and they can make money. This gives startups the freedom to do risky things like over-hire, charge too little, and throw the “business model” out on the street, sometimes forever. If investors are confident and the product has traction — like Uber — they’ll pour billions into it because they’re confident they’ll eventually make it back. But in his current precarious state, Trump would be a risky bet even for a VC. But all this is controversial because:
- TMTG is now accountable to its shareholders. Small startups may have to report to their VC masters every now and then, but they have free rein compared to public companies, which owe a fiduciary duty to their shareholders. Although Trump is TMTG’s largest shareholder at 60%, the remaining 40% is watching closely for any breach of that duty – such as a stock sale or a loan that drastically undervalues the company. But the important part here is that TMTG doesn’t have the freedom to throw cash around (they don’t have any anyway) and take risks. The whole point of going public is that you have a business that others want to share in — TMTG just doesn’t do that.
The result is, as analysts have already pointed out, that $DJT is fundamentally and wildly overvalued. The company is unlikely to turn a profit anytime soon, let alone the kind of profit that would justify its stock price and multibillion-dollar valuation. Even the most optimistic scenarios probably envision solvency as a distant goal.
On the other hand, given the personal, political, legal and business problems of the majority owner, there is a very real danger that the whole thing will blow up before the year is out.
The fact is that the share price is completely unrelated to the company’s performance, making it essentially a “meme stock” that will be arbitrarily priced and perhaps manipulated by public investors.
While this may make investors and short sellers money for a few days in the coming days and weeks, it is not something that holds value in the long term, especially given TMTG’s lack of assets. Until Trump can sell his shares, it’s likely that this company will be worth something like what it’s supposed to be today. It’s not even worth what it was this morning, with the stock down more than 20% since the market opened.
