A screen displays trading information on shares of Truth Social and Trump Media & Technology Group outside the Nasdaq MarketSite in New York on March 26, 2024.
Brendan McDermid | Reuters
Trump Media has become the latest stock to watch.
But rather than a meme stock — an investment that becomes popular with individual investors through social media — the company is more of a personality stock, according to John Rekenthaler, vice president of research at Morningstar.
“The reason people own these stocks is because, in one way or another, they support Donald Trump,” Rekenthaler said.
“It’s a leap of faith,” he said.
The former president is the majority shareholder of Trump Media, a company listed on Nasdaq under the initials of his name, DJT. The stock got off to a rough start this week, with two straight days of losses, although it was up more than 20% as of Wednesday afternoon.
The company’s mission statement is to end “big tech’s attack on free speech by opening up the Internet and giving voice back to the American people,” according to its website.
The company closest to Trump Media is Tesla, according to Rekenthaler. He said investors backed Tesla because they believed in Elon Musk, which helped propel the company to its peak value in 2021.
A key difference is that Tesla was a “much bigger company,” according to Rekenthaler, who wrote an April 10 op-ed criticizing Trump Media’s valuation.
Trump Media is currently a $4 million business through social media, he said. Meanwhile, the company is currently valued at over $3 billion, up from around $9 billion when it was released.
“The problem is that there is still room,” Rekenthaler said.
Like investors in any publicly traded company, Trump Media shareholders hope to eventually buy back their shares for more than they paid. However, there is no guarantee that this will happen, Rekenthaler said.
Other investors chose to bet against the stock through short sales. That, too, can be “dangerous,” Rekenthaler said.
“This stock is so unpredictable,” Rekenthaler said. “This could certainly rise in the near term and hurt the shorts.”
The company responded to a request for comment by referring to its Frequently Asked Questions webpage: Trump Media outlined risk factors for its business in a recent filing with the Securities and Exchange Commission related to its listing on the stock exchange. Among them are risks related to the former president, including his reputation and popularity; the possibility of his death, incarceration or incapacity; or the possibility that its relationship with the company will be interrupted or limited.
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Investing in a company tied to a high-profile celebrity carries some risks, noted Preston D. Cherry, PhD, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.
Aligning with a well-known personality can thus lead you to trust a company more, said Cherry, who is also a certified financial planner. But if the celebrity and the company go their separate ways – as with Adidas and Ye, also known as Kanye West, or Weight Watchers and Oprah – it can affect investment prospects.
Additionally, investors might get carried away by the excitement over a newly IPO stock, Cherry said.
“Retail investors have a sense of FOMO or fear of missing out on popular IPOs (initial public offerings),” Cherry said.
This can lead to these companies being overvalued as they emerge from the hype as a result of this hype, he said.
Since startup company stocks can be very volatile, average investors can face many dangers if they are tempted to trade on a daily basis or sell them short, said CFP Ted Jenkin, CEO and Founder of oXYGen Financial, a financial advisory and wealth management company. company based in Atlanta.
“These types of stocks are speculative at best,” Jenkin said.
Cherry and Jenkin are both members of the CNBC FA Council.
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