DWAC Stock: PIPE News Doesn’t Change Trump’s SPAC Story
In previous articles I have been skeptical about Digital world acquisition company (NASDAQ:DWAC) Stock. As you probably remember, this Special Purpose Acquisition Company (SPAC) takes on the social media business of former President Donald Trump, Trump Media & Technology Group (TMTG), Public. With prices soaring after the merger was announced, many are optimistic about the prospects for this deal.
Why is my opinion more bearish? Mainly because his implied valuation seemed high. At least, compared to the properties of conservative media comparable. With that, it turned out that Trump’s wacky platform would turn into a billion dollar business.
Having said that, is the announcement of $ 1 billion in private funding a game-changer? Yes and no. On the one hand, raising more money than expected increases the chances that this early stage company will meet the big goal (“tackle big technology”) set by its founder. On the other hand, whether this capital increase is favorable to existing shareholders is questionable.
Namely, because of the big discount it offers to buyers of PIPE. Worse yet, such an injection of capital may not be enough to make it a formidable competitor for Twitter (NASDAQ:TWTR). Even if he raises billions more, again on dilutive terms, the end result could be worth far less than bullish stock investors currently think. Besides the existing issues with this blank check company, sitting down is still the best decision.
DWAC Stock and its $ 1 billion PIPE funding announcement
As mentioned above, Digital World / TMTG has secured $ 1 billion in private investment in public capital commitments (PIPE). This is of course positive news. Previously, estimates predicted that PSPC would only raise $ 500 million in PIPE funding.
However, it is questionable whether this news justifies the recent increase in DWAC shares. After falling back to $ 40 per share, following its short-lived stock rally from $ 10 to $ 175 per share, stocks are back above the price level of $ 50 per share.
Why is this questionable? PIPE deal may help increase chances of Trump Social Truth the platform becomes a Facebook (NASDAQ:FB) or Twitter in the making. However, the conditions of the capital increase seem unfavorable to existing shareholders.
According to the press release, the securities that PIPE investors buy are converted into common stock at “a 20% discount from the volume weighted average closing price (VWAP) of DWAC for the five trading days before. December 1, 2021 inclusive. ”This discount could end up being larger, depending on the downward adjustment conditions.
Other obstacles remain
Besides the negative aspects of PIPE’s capital increase, existing issues are still on the table with DWAC shares. Again, $ 1 billion will go a long way in helping this startup achieve the former president’s goal of “fighting back” against big tech.
But will it be enough for Social Truth to become another Twitter? TMTG may need to raise more money to keep the lights on while it grows its business. This can lead to an even greater dilution of shareholders. Along with that, it is not certain that this platform, when built, will even attract the number of users needed to make it a widely used network.
After all, another platform on the topic of “freedom of speech”, Speaking, has only 11.1 million cumulative installations. The niche nature of this site (MAGA conservatism) could limit its potential user base. In turn, this indicates that the platform is becoming a success. But not on a scale sufficient to maintain and increase its current valuation.
Then again, I could be wrong in the end. 74 million Americans voted for Trump. Recent actions by new Twitter CEO Parag Agrawal, seen by conservative critics as an attack on free speech, could further alienate right-wing users of the mainstream site, leading them to Social Truth. The virulent critics of the former president do not hesitate to underline his many blunders. Both in business and in politics. Corn Social Truth could end up being one of his unexpected victories.
Conclusion on this Trump SPAC
The digital world may continue to rebound in the short term. Excitement over its PIPE deal may continue its upward trend. If the regulatory scrutiny it now faces passes, investors may have more reasons to bid on the stock. However, while this can be a great meme trade, it may not work well for investors with a longer time horizon.
The PIPE agreement is dilutive for existing investors. It may not be the last time the company has divided the pie into several other parts, either, via a capital increase. In addition, existing concerns are still on the table. This platform could end up getting much smaller than what the market is currently expecting.
So, with its appeal as a long-term investment still questionable, what’s the best solution? Continue to hold DWAC inventory.
At the date of publication, Thomas Niel did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Thomas Niel, collaborator of InvestorPlace.com, has been writing unique stock analysis for web publications since 2016.