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Donald Trump’s social network went public on Tuesday and quickly achieved a valuation of almost $8 billion (£6.3 billion), a gain of more than 15% on its initial public offering (IPO) value. Shares rose again in volatile trading on Wednesday, rising 13% by mid-morning to value them at $9.3 billion. That enormous success has raised questions, not all of which are easy to answer.
How can it possibly be worth $9 billion?
The slippery answer is “because the most recent price someone bought a share of the company at is $65.70.” The valuation of a publicly traded company like Truth Social – officially the “Trump Media & Technology Group Corp,” with the stock ticker DJT, referring to the founder’s initials – is merely a product of multiplying the value of an individual stock by the number excellent.
Typically, that value, known as market capitalization, is kept in check by referring to the company’s “fundamentals”: how much money it makes or loses, and how quickly it grows or shrinks. But sometimes… that’s not the case.
In the case of Truth Social, its revenue during the first nine months of last year was just $3.3 million from advertising, and it posted a loss of $49 million.
Why don’t investors care about fundamentals?
Historically, speculative bubbles have been the main reason why stock valuations become disconnected from reality. Even if you don’t think a company is particularly valuable, it may still be worth buying their shares at a high price if you think you can resell them at an even higher price.
But Truth Social appears to be part of a more recent phenomenon: the “meme stock.”
What is a meme stock?
The term was coined to describe a small group of publicly traded stocks that have attracted a large portion of private ‘retail’ investors. These investors typically use no-commission trading apps like Robinhood to take a much more active role in the markets than was common for individuals until recently, and coordinate on social media, particularly sites like Reddit, to share stock tips.
Infamously, the valuation of US video game retailer GameStop soared by more than 1,800% after a critical mass of investors took stock via the WallStreetBets subreddit. The investors’ theory was that an artificial “short squeeze” could force those who had “shorted” GameStop (that is, betting on a falling stock price) to buy back the shares at inflated valuations. Three years later, GameStop is still nearly 10 times more valuable than just before it reached meme stock status — and only a quarter of 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. Coordinating online to increase a stock’s value with many small investments from individuals, rather than large corporate investors, is a similar story to GameStop and other meme stocks like the movie theater chain AMC or the rental company Hertz.
But unlike those shareholders, it makes little sense that Truth Social investors are driven by, or even care about, making a profit on their stakes. Instead, the purchase is seen as an opportunity to invest in Trump – or even just to show your support for the man. 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 the former president has also delved into.
Could Trump sell out early?
With legal bills running into the millions — including one that was reduced this week from $454 million to a still-hefty $175 million — the big question for many is whether the Truth Social float will allow Trump to use his newfound paper wealth convertible into hard cash. Officially, the answer is a simple ‘no’: the IPO agreement requires insiders to retain their stake for six months after the company goes public.
But that could be overruled by a vote by the company’s board of directors, which includes independent voices like Donald Trump Jr., and Linda McMahon and Robert Lighthizer, two former officials in the Trump administration. Even if they choose not to approve a sale, they can offer a halfway house, rewriting the agreement to allow Trump Sr to use his shares as collateral for a loan.
Will Truth Social Ever Make Money?
A few years ago it was possible to foresee a bright future for Truth Social. The increasing polarization of American society made conditions ripe for a right-wing social network, in contrast to the Silicon Valley ideology that dominated online. Truth Social, with Trump’s backing, felt most likely to succeed in that area, against the 4chan-inflected tone of its predecessor Gab and Trump-affiliated site Parler.
Then Elon Musk bought Twitter. Under the billionaire’s ownership, the site, renamed X, has become the home of online law in its own right, losing a fifth of its users. There’s a lot of criticism you can level at Musk’s feet, but censoring right-wing views isn’t: one of his first acts when he took power was to revoke Trump’s ban on the platform – all for nothing, as the former president moved on to post on Truth Social instead.