Former President Donald Trump's digital media company is losing money, a lot. But why is it different from other startups, which often struggle to turn a profit for years, if ever?
There are a couple of reasons.
First, as a recap: Trump Media and technology Group recently merged with Digital World Acquisition Company in a SPAC, the ill-fated financial instrument that, in most cases, represents a last resort for a substantial cash injection. The company is on the NASDAQ as, unsurprisingly, $DJT.
An important part of going public is disclosing your finances to everyone, and TMTG recently presented its first quarterly financial report with the SEC that everyone can see and analyze. The financial press is celebrating, but the result is that TMTG is losing a lot of money and generating almost nothing. Specifically, the company lost $58 million on just $4 million in revenue.
Those inclined to be charitable toward a tech startup that challenges entrenched rivals—regardless of its “mission” or leadership—might reasonably observe that this imbalance is common among early-stage companies with big ambitions. And so it is: who can forget that Uber operated at huge losses for years to undermine the taxi industry's business model?
TMTG is superficially similar, mainly because it doesn't make money. But that doesn't make it a startup on the brink of explosive growth. There are three important and simple reasons:
- TMTG is not growing. Truth Social, TMTG's main business, has failed to attract more than a few million users. It hasn't shown the kind of traction any startup would need to show to suggest it's the next big thing, or anything at all (as others have pointed out, twitter had $665 million in annual revenue when it went public). . The incredibly low revenue numbers tell us that their only source of income, advertisers, don't want to pay for the audience there. And there is no real reason to expect this to change.
- TMTG does not have a VC landing strip. Venture capital is a high-risk, high-reward strategy in which you prop up fundamentally unprofitable companies until something changes and they can make money. This gives startups the freedom to do risky things like overhire, charge too little, and leave the “business model” by the wayside, sometimes forever. If investors are confident and the product has traction (like Uber), they will invest billions in it because they trust they will eventually get it back. But in his current precarious state, Trump would be a risky bet even for a venture capitalist. But all that is debatable because:
- TMTG is now accountable to its shareholders. Small startups may have to answer to their venture capital bosses from time to time, but they have free rein compared to public companies, which have fiduciary duties to their shareholders. Although Trump is TMTG's largest shareholder at 60%, the other 40% is closely monitoring any breach of this duty, such as a fire sale of stock or a loan that drastically undervalues the company. But the important thing 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 that you have a business that others want to share; TMTG just doesn't do it.
The result is, as analysts have already pointed out, that the DJT dollar is fundamentally and tremendously overvalued. The company is highly unlikely to turn a profit any time soon, 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 problems, there is a very real risk that everything will implode before the year is out.
The fact of the matter is that the share price has no relationship to the performance of the company, essentially making it a “meme stock” whose price will be arbitrary and perhaps manipulated by public investors.
While that may make money for some day traders and short sellers over the coming days and weeks, it's not the kind of thing that retains value in the long term, particularly with TMTG's lack of assets. By the time Trump can sell his stock, this company will likely be worth something close to what it is supposedly worth today. It's not even worth what it was this morning, with the stock down more than 20% since the market opened.
