The Lessons Investors Should Learn From Truth Social

Johannesburg, 13 May 2024 - The debut of Trump Media & Technology Group on Nasdaq, marked by the trading of its social media platform Truth Social under the ticker "DJT," captured significant attention with its shares initially skyrocketing to $79.38 each before stabilizing at $57 by the close of the day. This surge valued the company at approximately US$11 billion despite substantial losses and declining user engagement. Fred Razak, Chief Trading Strategist at CMTrading, offers an analysis that outlines essential lessons for investors.

Understanding the Valuation Dynamics

"Analysing a company's worth, especially one as freshly public as Trump Media, presents unique challenges," Razak explains. "Investors generally fall into two camps: those who adhere to fundamental analysis, examining financial statements and economic indicators, and those who prefer technical analysis, focusing on share price movements and market trends. Both approaches struggle to accurately appraise a new public entity lacking extensive financial history.

"In Trump Media's case, the valuation intricacies are further compounded by its association with Donald Trump's personal brand. The strength of this brand is a significant, though intangible, asset, which likely contributed to the initial market overreaction and subsequent price corrections."

Trump's Influence on the Company's Valuation

"Donald Trump retains a 64.9% stake in the company, equating to about 115 million shares, nominally valued at around US$3.6 billion. However, these figures are largely notional until actual transactions occur," says Razak. "Trump's immediate financial benefit is constrained, as company rules prevent him from liquidating or leveraging his shares for at least six months post-IPO."

Strategic Takeaways from the IPO

Razak highlights several crucial lessons from Truth Social's market debut. "Firstly, regulatory frameworks surrounding IPOs often include restrictions such as bans on short selling to prevent market volatility. This is a critical consideration for investors looking to understand stock stability post-IPO," he notes.

"Moreover, the real challenge lies in the unpredictability of stock performance on launch day—whether it will plummet and then recover or surge and then plummet. Given these uncertainties, it may be wise for investors to remain on the sidelines initially, allowing the market to stabilise and offer a clearer picture of the stock's true value.

Navigating IPO Investments with Caution

"Predicting how a stock will react on its first trading day is incredibly challenging. Market responses can vary dramatically, making it risky to engage without a solid strategy based on price action or other reliable indicators," Razak advises. "In cases like this, where the valuation complexities are intertwined with high-profile personalities and brand perceptions, waiting for the dust to settle can often lead to more informed, and potentially more profitable, investment decisions."

While the initial performance of Truth Social on the stock market was marked by volatility and speculation, the insights provided by Razak shed light on the underlying factors investors must consider. These include the influence of brand identity, market regulations, and the inherent uncertainties of newly public companies. As the market continues to adjust to Truth Social's presence, these lessons remain vital for investors navigating similar high-profile IPOs in the future.