The Wild Ride of Trump Media Stock: Unraveling the Extreme Turbulence
Hold on tight! Trump Media & Technology Group is on a rollercoaster ride with potential 5% swings in every direction. Don't look away, the volatility is real.
Don’t blink or you might miss a big swing in Trump Media & Technology Group’s stock price. The Truth Social owner has been public for just two weeks, but it has already taken traders on a rollercoaster ride. The stock price has seen huge spikes followed by dramatic drops, making Trump Media even more volatile than bitcoin.
The extreme turbulence in the stock market has led to significant fluctuations in the net worth of the company's largest shareholder and chairman, former President Donald Trump. His net worth has dropped by over $2 billion since the closing price of Trump Media on March 27, the day after it became publicly traded. On one particularly tough day, Trump's net worth plummeted by $1 billion.
There are several factors contributing to the volatility of Trump Media shares, one being the company's strong connection to the former president. Trump's name recognition, polarizing political image, and close ties to the company have attracted the interest of individual investors, professional traders, and the media. This has created a highly volatile atmosphere for the stock.
"Matthew Tuttle, CEO of Tuttle Capital Management, believes that the stock market is experiencing extreme volatility due to Trump. He advises retail investors to avoid buying or betting against the stock in the long term."
The Truth Social app on a smartphone arranged in New York, US, on Friday, March 22, 2024.
The Truth Social app on a smartphone arranged in New York, US, on Friday, March 22, 2024.
Gabby Jones/Bloomberg/Getty Images
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Trump Media, trading under the ticker symbol "DJT," has experienced significant fluctuations in its stock price during its initial nine trading days. In fact, the stock has consistently moved up or down by at least 5% each day, with over half of the days seeing double-digit percentage changes. This level of volatility is unusual and not typical in the stock market.
Trump Media’s daily stock performance, as analyzed by Michael Ohlrogge, associate professor at NYU School of Law, shows a standard deviation of approximately 13%. This is significantly higher than the average standard deviation for companies of similar market valuation during the same period.
According to Ohlrogge, this high standard deviation indicates that Trump Media's stock performance is "untethered" to fundamentals.
Trump Media is experiencing significant movement in the stock market compared to other companies. This is due to the fact that it received a highly profitable valuation during its initial public offering, which experts find to be illogical. Companies with inflated valuations like this often experience greater volatility and struggle to maintain stability when their stock prices drop.
In February, Similarweb reported a significant decrease in Truth Social's monthly active users in the United States on both iOS and Android platforms. The number of users dropped by 51% compared to the previous year.
Despite losing $58 million in 2023 and only making $4.1 million in revenue, Trump Media was valued at a whopping $11 billion on its first day of trading.
Pedestrians walk past the Nasdaq building Tuesday, March 26, 2024, in New York. Trump Media, which runs the social media platform Truth Social, now takes Digital World's place on the Nasdaq stock exchange.
Pedestrians were seen walking past the Nasdaq building on Tuesday, March 26, 2024, in New York. Trump Media, the company behind the social media platform Truth Social, has replaced Digital World on the Nasdaq stock exchange.
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Ohlrogge mentioned that "This stock seems to be completely untethered to fundamental value."
According to Matthew Kennedy, senior IPO strategist at Renaissance Capital, Trump Media's valuation is incredibly high. Even if the stock price dropped by 50% each day this week, it would still be valued much more than any of its competitors.
One way to evaluate stocks is by looking at their price-to-sales ratio. Kennedy noted that if Trump Media were to experience a 50% decrease in value each day for a week, its market worth would be approximately $173 million. This would be around 40 times the company's revenue for 2023. In comparison, Reddit has a price-to-sales ratio of 11, Meta's ratio is 10, and Snap's is 4. Even Rumble, a video platform that claims to be resistant to cancel culture, has a ratio of 22.
Kennedy mentioned that a company with minimal revenue does not have a strong foundation for its stock value.
Not many shares are being traded at the moment. One important factor to consider is that analysts believe Trump Media's shareholders are mostly momentum traders. These traders have the ability to magnify market movements, so a 4% decrease could turn into a 12% drop - and the opposite could also happen.
Kennedy mentioned that traders who buy based on momentum tend to also sell based on momentum. Any negative news can trigger a selloff, or even the absence of news can. Additionally, another factor to consider is that Trump Media is a recently launched stock.
Michael Shvartsman walks following a hearing at the Manhattan Federal Court, in New York City, U.S. July 20, 2023.
Michael Shvartsman walks following a hearing at the Manhattan Federal Court, in New York City, U.S. July 20, 2023.
Amr Alfiky/Reuters
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When companies choose to go public, they typically do so through either a traditional IPO or by merging with a SPAC. Trump Media took the SPAC route, which often leads to a rocky start for the company.
Part of the reason for this is the lack of a trading history and the fact that these companies are not well-established. Furthermore, a significant portion of the shares are currently restricted from being traded due to lock-up restrictions that prevent insiders from selling their stock.
This problem is even more pronounced with Trump Media. The former president holds 78.8 million shares, but he is unable to sell them in the near future.
Trump Media has approximately 137 million shares in total. However, only 40 million of these shares are available for trading, known as the free float, as reported by Refinitiv. This means that the actual number of shares being traded is even lower, contributing to high levels of volatility in the stock.
People who want to short it can’t
The tiny float makes it very difficult for skeptics who want to bet against Trump Media to do so.
Shorting a stock involves borrowing shares before selling them, which has been challenging with Trump Media due to high costs. According to S3 Partners, as of last Thursday, Trump Media was the most expensive stock to borrow among those with over $50 million of short interest.
Bob Sloan, who is the managing partner at S3 Partners, mentioned in an interview with CNN that this particular difference shows that investors who are betting on a decrease in stock prices in the near future are quite confident about their prediction.
CNN
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Tuttle expressed frustration with the high borrowing rate, stating that it made it difficult to profit from shorting the stock. The borrow rate could potentially wipe out any gains if the stock went to zero, which Tuttle found unreasonable.
In addition to the limited supply of shares available for borrowing, there is also high demand due to the belief of some market veterans that the stock is overvalued.
"Many people are eager to short it. This high demand is causing the borrowing rate to increase rapidly, making it extremely challenging to short," shared Tuttle. He attempted to short just $100 of stock from his Charles Schwab account on Monday but was unable to do so because there were not enough shares available.
As a result of this situation, investors find it more convenient to place bullish bets, leading to a significant surge in Trump Media shares.
Tuttle mentioned that retail investors may eventually drive up the stock price of Trump Media. He suggested that the stock could potentially reach $70 in the near future.
Typically, when stocks exceed their intrinsic value, short sellers step in to push the price back down and make a profit. However, it has been more challenging for short sellers to bring down the stock price of Trump Media, leading to spikes in its early trading days.
“There is not the normal check on irrationally high prices,” said Ohlrogge, the NYU professor.
The Trump factor
The Trump factor has greatly influenced all of this. This company's success is closely tied to the popularity and political future of the former president.
Tuttle pointed out, "If my initials were MBT instead of DJT, this stock would probably only be trading at one dollar."
The stock has become a way for people to gamble on Trump's political success. According to Renaissance's Kennedy, the value of the company is higher if Trump wins the presidency, but much lower if he does not.
Former President Donald Trump paid cash for his $175 million bond, according to billionaire supporter Don Hankey
Former President Donald Trump paid cash for his $175 million bond, according to billionaire supporter Don Hankey
Mary Altaffer/AFP/POOL/Getty Images
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Jonathan Macey, a professor at Yale Law School, believes that this divide in perspectives helps to clarify the ongoing struggle in the marketplace.
According to Macey, some Trump supporters view a big balloon rising and believe it will never come back down. On the other hand, there are savvy investors who grasp concepts like gravity and are placing their bets on a quick return to the ground.
Editor's P/S:
The recent volatility of Trump Media & Technology Group's stock price has been a rollercoaster ride for investors. The company's strong connection to former President Donald Trump has attracted a wide range of interest, from individual investors to professional traders. This has resulted in extreme volatility, with significant daily fluctuations in the share price.
The lack of a trading history, restricted shares, and a small available float have exacerbated the volatility. Additionally, the company's high valuation relative to its revenue and lack of profitability raise concerns about its long-term stability. While some investors speculate on potential political developments, experts advise caution due to the high borrowing costs for shorting the stock and the difficulty in finding shares to short.
