Donald Trump’s social network floated on Tuesday, quickly valuing it at nearly $8bn (£6.3bn), a rise of more than 15% on its initial public offering (IPO) value. Shares rose again in volatile trading on Wednesday, rising 14%, valuing the company at $9.6 billion. This huge success has also raised some questions, not all of which are easy to answer.
How could it possibly be worth $9 billion?
The diplomatic answer is “because someone bought the company’s stock at the latest price of $66.46.” The valuation of a publicly traded company like Truth Social (formally known as Trump Media Technology Group Inc. and stock symbol DJT, in reference to its founder’s initials) is simply the value of a single stock multiplied by the number of outstanding shares.
Typically, this value, known as market capitalization, is controlled by reference to a company’s “fundamentals”: how much money it makes or loses, and how quickly it grows or shrinks. But sometimes…that’s not the case.
Take Truth Social as an example. Its advertising revenue in the first nine months of last year was only US$3.3 million, with a loss of US$49 million.
Why don’t investors care about fundamentals?
Historically, a big reason why stock valuations are divorced from reality is because of speculative bubbles. Even if you don’t think a company is particularly valuable, it may still be worth buying its shares at a high price if you think you can sell them at a higher price.
But Truth Social appears to be part of a recent phenomenon: “meme stocks.”
What are meme stocks?
The term was coined to describe a small group of publicly traded stocks that attract a large portion of private “retail” investors. These investors often use zero-commission trading apps like Robinhood to take a more active role in the market than they previously could as individuals, and coordinate on social media, especially sites like Reddit, to share stock tips.
Infamously, US video game retailer GameStop’s valuation increased by more than 1,800% after a large number of investors coordinated their stakes on the WallStreetBets subreddit. Investors theorized that an elaborate “short squeeze” could force those who were “shorting” GameStop (that is, betting that its stock price would fall) to buy back shares at an inflated valuation. Three years later, GameStop’s market capitalization is still nearly 10 times higher than it was before it reached meme stock status and only a quarter below its peak.
Is Truth Social a real meme stock?
Investors in Donald Trump’s social network certainly have a lot in common with those in the GameStop bubble. GameStop’s story is similar to that of other meme stocks, such as movie theater chain AMC or rental company Hertz, in that large amounts of small investments from individuals rather than large corporate investors were coordinated online to boost the stock’s value.
But unlike these shareholders, Truth Social investors are rarely driven by, or even concerned about, making a profit on their shares. Instead, buying is seen as an opportunity to invest in Trump, or even just to show your support for Trump. In this way, Truth Social has less in common with other meme stocks and more in common with non-fungible tokens (NFTs) and cryptocurrencies — a market that the former president has also dabbled in.
Can Trump sell in advance?
With legal bills running into the millions, including a hefty legal bill that was reduced this week from $454 million to a still-high $175 million, the big question for many is whether the truth social float will allow Trump to push his new Paper wealth found turned into cash. The official answer is a simple “no”: The IPO agreement requires insiders to hold shares in the company for six months after it goes public.
But that could be overturned by a vote of the company’s board of directors, including independent voters including Donald Trump Jr. and two former Trump administration officials, Linda McMahon and Robert Lighthizer. Even if they choose not to authorize the sale, they may offer a compromise that rewrites the agreement so that Trump Sr. can use his stock as collateral for the loan.
Can Truth Social make money?
A few years ago, one could foresee a bright future for Truth Social. The increasing polarization of American society means conditions are ripe for right-wing social networking, in stark contrast to the Silicon Valley ideology that dominates the web. With Trump’s backing, Truth Social feels like the company most likely to succeed in its space, a departure from the tone of its predecessor Gab and 4chan, the Trump-allied site Parler.
Then Elon Musk bought Twitter. Under the billionaire’s control, the site, renamed X, has become an independent online power house, losing a fifth of its users in the process. There are many criticisms one can level at Musk, but criticism of right-wing views is not one of them: one of his first actions after taking power was to reverse Trump’s ban on the platform — all in vain, as the former The president went ahead and posted on Truth Social instead.
