Understanding the Dramatic $1 Billion Net Worth Plunge: Trump's Financial Rollercoaster

Hey there! Have you ever watched the Road Runner cartoon? Do you remember Wile E. Coyote's classic move of running off a cliff and only realizing he's suspended in mid-air when he looks down? Just like in the cartoons, sometimes in real life, we may find ourselves in a similar situation.

Investors in Trump Media & Technology Group, the parent company of Truth Social, had a rough day on Monday. Trump Media shares dropped by 21% following the revelation that the company came dangerously close to running out of cash last year. In fact, it was only saved from potential collapse by a last-minute infusion of capital through a merger with a shell company, which enabled it to go public.

Despite Monday's setback, the stock has still risen by approximately 200% in the last six months, resulting in a valuation of $6.6 billion that seems unreasonable. This significant increase in value has also greatly boosted the wealth of the former president, who holds a 54% ownership stake in the company. However, he did experience a loss of around $1 billion in Monday's selloff alone.

It is common for Wall Street to support startups that are not yet profitable, as long as there is a substantial amount of cash flowing through the business and a clear path to eventual profitability. Unfortunately, this does not seem to be the case in this situation.

Trump Media, also known as TMTG, only brought in $4.1 million in revenue last year. This indicates that the stock is trading at approximately 1,500 times its annual revenue. Even the most overvalued AI stocks do not reach this level of disparity.

According to Axios’ Dan Primack, "It is clear that the equity value of TMTG has no connection to the actual business. Owning TMTG at this point is essentially like making a donation to Donald Trump."

Meme Stocks 101

Last week, I mentioned how the excitement around Trump Media went from low to high, showing typical meme stock behavior. People investing in these stocks are not just following the usual trends; they are fueled by a strong belief, almost like a passionate devotion or a powerful online influence that transforms them into enthusiastic supporters and influencers.

It is nearly impossible to predict how this situation will unfold. The phenomenon of internet-driven trading, known as meme stock-ery, is still relatively new. The term itself was only coined in January 2021, when a group of amateur day traders on Reddit caused GameStop shares to skyrocket.

If history repeats itself with Trump Media, investors should be prepared for a bumpy ride. GameStop's stock price plummeted shortly after reaching over $100, leaving many to believe the excitement was over.

The Reddit community showed an unexpected level of dedication to the stock of GameStop and the David-vs-Goliath story that surrounded it. It took three years for GameStop's stock to return to normal.

Monday's drop in stock value does not mean the end for Trump and his social media company. Just like the Coyote in the cartoons, they will likely bounce back and continue their pursuit. However, the upcoming days, weeks, and even months or years may be filled with ups and downs.

Editor's P/S:

The situation surrounding Trump Media & Technology Group and its stock performance is a testament to the volatility and unpredictability of meme stocks. Despite the company's financial struggles and lack of clear profitability, its stock has skyrocketed due to investor enthusiasm and speculative trading. While this may seem like an incredible opportunity, experts warn that the stock's valuation is vastly inflated and disconnected from the company's actual performance.

The meteoric rise of Trump Media's stock echoes the phenomenon seen with GameStop in 2021, where amateur traders on Reddit drove up the stock price to unsustainable levels. This type of trading, known as meme stock-ery, is driven by social media sentiment and emotional investment rather than sound financial analysis. As history has shown, meme stocks often experience sharp declines after reaching their peak, leaving investors with significant losses.