Former President Donald Trump's digital media company is losing money, and a lot of it. But why is this different from other “startups”, which often struggle to turn a profit for years, if they ever manage to?
There are two reasons.
First, as a recap: Trump's media and technology conglomerate recently merged with Digital World Acquisition Company in a SPAC, the notorious financial vehicle that represents, more often than not, a last-ditch option for a major cash infusion. The company is listed on Nasdaq as expected with $DJT.
An important part of going public is disclosing your finances to the world, and TMTG recently filed its first quarterly financial report with the Securities and Exchange Commission that everyone can view and analyze. The financial press is having a field day, but the result is that TMTG loses a lot of money and generates almost nothing. Specifically, the company lost $58 million on revenue of just $4 million.
Those inclined to do philanthropy to tech startups that challenge established competitors — regardless of their “mission” or leadership — might reasonably note that this imbalance is common among early-stage companies with big ambitions. And who can forget that Uber operated at huge losses for many years in order to undermine the taxi industry's business model?
TMTG is superficially similar, primarily in that it doesn't make money. But that doesn't make it a startup on the verge of massive growth. There are three big, straightforward reasons:
TMTG is not growing. Truth Social, TMTG's flagship company, failed to attract more than a few million users. It hasn't shown the kind of traction that any startup needs to show in order to signal that it's the next big thing, or anything at all (as others have pointed out, Twitter generated $665 million in annual revenue when its IPO took place). The incredibly low revenue numbers tell us that the only source of revenue, advertisers, don't want to pay for the audience that is there. There is no real reason to expect this to change. TMTG has no VC runway. Venture capital is a high-risk, high-reward strategy where unprofitable companies are essentially backed until something changes and they can make money. This gives startups the freedom to do risky things like over-hire, under-charge, and scrap the “business model” in the future, sometimes forever. If investors are confident, and the product has traction – like Uber – they will pour billions into it because they are confident they will make it back in the end. But in his current precarious state, Trump would be a risky bet even for venture capital. But this is all moot because: TMTG is now accountable to its shareholders. Small startups may have to report to venture capital overlords every now and then, but they have more discretion than public companies, which have fiduciary duties to their shareholders. Although Trump is TMTG's largest shareholder with 60%, the other 40% are closely watching for any breach of that duty — such as a fire sale on stock, or a loan that significantly reduces the company's value. But the important part here is that TMTG doesn't have the freedom to spend money (they don't have any anyway) and take risks. The basic idea of going public is to have a business that others want to participate in, but TMTG simply doesn't want to.
The result is, as analysts have already pointed out, that DJT is fundamentally and significantly overpriced. The company is unlikely to turn a profit anytime soon, let alone the kind of profit that justifies the stock's multibillion-dollar price and valuation. Even the most optimistic scenario might see debt repayment as an unattainable goal.
On the other hand, given the majority owner's personal, political, legal and business problems, there is a very real risk that the whole thing will collapse before the year is out.
The fact of the matter is that the stock price is completely uncorrelated with the company's performance, making it essentially a “meme stock” that will be arbitrarily priced and possibly manipulated by public investors.
While that may make some day traders and short sellers money over the next few days and weeks, it's not the kind of thing that will hold value over the long term, especially with TMTG's lack of assets. By the time Trump is able to sell his shares, the value of this company will likely be similar to what it is supposed to be today. It's not even worth what it was this morning, as the stock is down more than 20% since the market opened.
