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Don’t Try to Bet on or Against Digital World Stock

Based on the recent headlines about Digital World Acquisition (NASDAQ:DWAC) stock, you would think that it was about to plunge. However, DWAC stock has stayed strong.

Source: rafapress / Shutterstock

The shares closed yesterday at $85…

Based on the recent headlines about Digital World Acquisition (NASDAQ:DWAC) stock, you would think that it was about to plunge. However, DWAC stock has stayed strong.

Source: rafapress / Shutterstock

The shares closed yesterday at $85.16 per share, or eight times its offering price. As you likely know, this SPAC is taking former President Donald Trump’s social media company public. The latter entity, known as Trump Media and Technology, or TMTG, is still in the pre-revenue stage. Earlier this month, TMTG announced that the launch of its platform, a social media website called TRUTH Social, would be delayed.

Instead of launching on President’s Day, as previously announced, it will go live by the end of next month. But while much of the media is gleefully enjoying Trump’s latest hiccup, investors who are bullish on the stock have not yet lost confidence in it. That faith  could continue up until and even after TRUTH’s eventual launch.

As a result, trying to bet against DWAC stock, whether by shorting it or via put options, may not be worthwhile. At the same time,  keep in the mind that it has many red flags.

Why TRUTH’s Setbacks Haven’t Dented DWAC Stock Recently

Besides the recent news about the delayed launch of TRUTH Social, there have been plenty of other negative headlines about Digital World and its merger partner. But much of the adverse press has to do with the adversarial relationship between Trump and the mainstream media.

Yet one development is a pretty big red flag. Namely, as I discussed in my last article on DWAC stock, there is a risk that the SEC will block the deal. That could happen if the agency finds evidence that the SPAC’s intention at the time of its initial offering was to carry out a deal with Trump.

But this risk has not done anything to dampen the enthusiasm for Digital World. Although it hasn’t regained its all-time high of $175 per share, it continues to trend higher, and the stock has jumped 66% in 2022. So what’s driving this excitement about the shares, even though there’s a great deal of uncertainty about TMTG’s future?

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Not surprisingly, the former President’s large fan base is playing a role in keeping the price of DWAC stock elevated, similarly to how fans of AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) stock have enabled them to avoid completely collapsing. There’s a great deal of evidence to suggest, however, that the price of DWAC stock will eventually crater.

The Bear Case on Digital World Still Makes Sense

As another InvestorPlace columnist, Mark Hake, recently reported, Digital World and TMTG have a pro forma market capitalization of $16.03 billion. To sustain and/or increase this valuation, Trump Media will need to eventually generate many billions of dollars of revenue. That may be a tall order.

Trump continues to have a large fan base. That’s evident from his ability to make money after leaving the White House, and from retail investors’ support of DWAC stock. Consequently, the assertion by some Trump critics that TRUTH Social will end up “crashing and burning” appears to be based more on emotion than on cold, hard facts.

However, as I argued previously, at best this latest Trump venture may be able to generate several hundred million dollars in annual revenue. I based my argument on the performance of  existing conservative media platforms. Down the road, DWAC stock will likely drift down to a price more in-line with its long-term prospects.

Stay Away From Digital World

Just as  the rallies of AMC and GameStop stock eventually ended, Digital World’s strong run will probably cease, too . When that will happen is anyone’s guess, since discouraging news, such as the delay of TRUTH Social’s launch, has done little to hurt the performance of the shares.

I don’t expect further delays to have much impact on the stock. The longer it takes for TMTG to launch, the longer it’ll be easy for bullish  investors to believe that this site will be able to effectively compete with Twitter (NASDAQ:TWTR) and Meta Platforms’ (NASDAQ:FB) Facebook. Actually,  at best TRUTH Social will likely be a niche service.

While shorting DWAC stock does not look worthwhile, the same can be said about going long DWAC stock at today’s prices. Over time, the stock is more likely than not to revert to a price far below today’s levels.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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