Trump Media & Technology Group (NASDAQ: DJT) is arguably one of the more controversial stocks on the market today. The company is the parent of Truth Social, the social media site linked to former president and Republican nominee Donald Trump.
Indeed, investors should avoid making decisions inspired by a high level of admiration for the former president, nor should they make purchase or sales decisions out of extreme dislike for Trump.
Instead of personal biases driving decisions, investors should strive to understand the risks associated with the social media stock before making an investment decision. To that end, they should understand three possible perils before becoming a Trump Media shareholder.
1. Dependence on Donald Trump
For all of the company’s potential, one cannot escape its dependence on Trump. Admittedly, the former president has a massive fanbase. This is evidenced by his ability to secure the presidential nomination three times.
Additionally, Trump Media is not necessarily doomed if Trump loses the upcoming election. The former president attracted considerable media attention since the 1980s and managed to maintain a continuous public presence before he went down the escalator at Trump Tower in 2015 to launch his first presidential campaign.
However, investors are also right to ask what would happen if he disappeared from the platform. That potential danger came to light following the attempted assassination of Trump on July 13.
In comparison, X would likely thrive even if its current owner, Elon Musk, decided to stop tweeting, and the sites owned by Meta Platforms would probably still have billions of monthly active users without Mark Zuckerberg. Hence, from that perspective, the site appears weak.
2. The competitive media landscape
Speaking of sites like Facebook and X, it is also unclear what Truth Social has to offer the industry besides more Trump content. Indeed, the launch of a streaming channel could become an additional revenue source for the company.
Still, Meta dominates the industry with 3.2 billion daily active users across Facebook, Instagram, and the company’s other sites.
Additionally, sites like X, formerly known as Twitter, built a niche with media personalities, while Snap‘s Snapchat holds appeal with users under 25. Hence, if Truth Social went offline immediately, social media consumers would have other sites to which they could turn.
Moreover, Trump himself may have inadvertently pointed out the limitations of Truth Social when he agreed to appear in a live interview on X with Musk. Musk claimed the interview attracted 1 billion views. Even if one does not accept X’s definition of a “view,” it is unlikely Trump could have accomplished the same level of viewership on Truth Social.
3. Trump Media was born from a SPAC
Finally, the method by which Trump Media came to the market may concern some investors. Instead of launching the stock through a traditional initial public offering, Trump Media went to the market when a special purpose acquisition company (SPAC) bought it.
Admittedly, successful companies such as DraftKings and SoFi Technologies came to the market through a SPAC. Still, SPACs have less stringent requirements than IPOs, and consequently, numerous SPACs tend to underperform the market over one-year and three-year time periods.
Investors should not necessarily assume Trump Media is doomed to fail. Even though it lost $16 million in the second quarter of 2024, its $344 million in liquidity can cover many years of losses at the current rate.
Still, Trump Media stock carries significant risks, both due to its SPAC status and the previously mentioned challenges, and investors should consider these when buying it.
Should I buy Trump Media stock?
Investors should probably treat Trump Media stock as a speculative play if they choose to buy. The former president is adept at drawing attention, and his business successes and presidential election victory in 2016 are reminders of his ability to beat the odds.
However, it is unclear whether the company can draw a significant following for Truth Social or its upcoming streaming site without Trump’s presence. Additionally, it will likely struggle to draw viewers from older, more established social media sites, and the past performance of SPACs may not bode well for the stock. Considering the challenges facing this company, avoiding the stock is probably the best course of action for most investors.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
3 Risks Investors Should Understand Before Buying Trump Media Stock was originally published by The Motley Fool
