Former President Donald Trump’s digital media company is losing money, and a lot of it. But how is this different from other “startups,” which often struggle to turn a profit for years, if they ever do?
There are several reasons.
First, to recap: Trump Media and Technology Group recently merged with Digital World Acquisition Company in a SPAC, the unlucky financial instrument that, more often than not, represents a last-resort option for an infusion of substantial liquidity. The company is listed on NASDAQ under the name, predictably, $DJT.
An important part of going public is revealing your finances to the world, and TMTG recently filed its first quarterly financial report with the SEC for everyone to view and analyze. The financial press has a field day, but the result is that TMTG loses a lot of money and generates almost none. Specifically, the company lost $58 million on just $4 million in revenue.
Those inclined to be charitable toward a tech startup that challenges its established rivals – regardless of its “mission” or leadership – can reasonably observe that this imbalance is common among startups with big ambitions. And so it is: who can forget that Uber suffered huge losses for years in order to undermine the taxi industry’s business model?
TMTG is superficially similar, mainly in the sense that it doesn’t make money. But that doesn’t make it a startup on the verge of explosive growth. There are three main and simple reasons for this:
- TMTG is not growing. Truth Social, TMTG’s core business, has failed to attract more than a few million users. It hasn’t demonstrated the type of traction any startup would need to suggest it’s the next big thing, or really anything (as others have pointed out, Twitter had $665 million in annual revenues at the time of its IPO). The incredibly low revenue numbers tell us that its only source of revenue, advertisers, are unwilling to pay for the audience. And there’s no real reason to expect that to change.
- TMTG does not have a VC track. Venture capital is a high-risk, high-reward strategy in which fundamentally unprofitable companies are backed until something changes and they can make money. This gives startups the freedom to do risky things like hire too much, charge too little, and reject the long-term “business model,” sometimes forever. If investors are confident and the product is successful – like Uber – they will invest billions in it because they are confident that they will eventually make that money back. But in his current precarious state, Trump would be a risky bet, even for a VC. But all this is irrelevant because:
- TMTG is now accountable to its shareholders. Small startups may have to report to their venture capital overlords from time to time, but they have carte blanche compared to public companies, which have a fiduciary duty to their shareholders. Although Trump is TMTG’s largest shareholder with 60%, the remaining 40% are closely monitoring any failure to do so – such as a forced sale of stock or a loan that significantly undervalues the company. But the important thing here is that TMTG doesn’t have the freedom to spend money (they don’t anyway) and take risks. The basic idea of going public is that you have a business that others want to share in – that’s just not the case with TMTG.
The result is, as analysts have already pointed out, that $DJT is fundamentally and vastly overvalued. The company is very unlikely to make a profit in the near future, let alone the kind of profit that would justify the stock price and multibillion-dollar valuation. Even the most optimistic scenarios probably envision solvency as a distant goal.
On the other hand, given the majority owner’s personal, political, legal and business difficulties, there is a very real risk that the whole thing will implode before the end of the year.
The fact is that the stock price has no connection to the performance of the company, essentially making it a “meme stock” whose price will be arbitrary and perhaps manipulated by public investors.
While this may make a few day traders and short sellers money over the next few days and weeks, it’s not the sort of thing that retains value over the long term, especially with the lack of TMTG assets. By the time Trump is able to sell his shares, it’s likely that this company will be worth something like what it’s supposed to be worth today. It’s not even worth what it was worth this morning, with the stock down more than 20% since the market opened.
techcrunch
