Few things garner the attention of Wall Street and investors better than a stock that's being whipsawed by a double-digit percentage on a near-daily basis. This has become something of the norm for Wall Street's newest meme stock, Trump Media and Technology Group (DJT 11.98%) (TMTG).
On March 26, the parent company of social media platform Truth Social completed its merger with special purpose acquisition company (SPAC) Digital World Acquisition and became the public company we now know as "Trump Media." In a span of two weeks, Trump Media's stock doubled and subsequently gave up almost the entirety of its gains.
While some investors may view Trump Media as the next great short squeeze opportunity, there are quite a few reasons it should be avoided like the plague from an investment standpoint.
Donald Trump's popularity is critical to the success of Truth Social and TMTG as a whole. Image source: Official White House Photo by Shealah Craighead.
Trump Media is, arguably, one of Wall Street's most outrageously expensive stocks
Let me preface this discussion by making one thing clear: this has nothing to do with politics. Rather, it has everything to do with inherent risk factors to TMTG's operations, its shaky balance sheet, and the company's inability to come anywhere close to hitting previously issued projections.
For example, TMTG lists "Former Chairman President Donald Trump" as a key factor affecting the company's operations:
TMTG's success depends in part on the popularity of our brand and the reputation and popularity of President Trump. The value of TMTG's brand may diminish if the popularity of President Trump were to suffer... Additionally, TMTG's business plan relies on President Trump bringing his former social media followers to TMTG's platform.
Yet the interesting thing about Trump Media's latest 8-K filing with the Securities and Exchange Commission is its omission of key performance indicators (KPIs), including total users and average revenue per user (ARPU). While management claims that these KPIs could coerce short-term decision-making that isn't in the best interests of shareholders, it looks like nothing more than a rouse to avoid divulging how poorly Truth Social has performed.
Former president's Truth Social account has fewer than 7 million followers, whereas his X account (the platform formerly known as Twitter) has north of 87 million followers. People don't appear to be following Donald Trump to Truth Social.
From an operating standpoint, Trump Media is an early stage disaster. Based on a presentation in November 2021 from Digital World Acquisition (the SPAC that merged with Trump Media), TMTG was expected to generate $114.1 million in estimated sales in 2023, $835 million in projected sales in 2024, and a lofty $3.67 billion in net sales by 2026. In reality, the company recorded just $4.13 million in net sales last year and lost $58.2 million. Even excluding changes in derivative liabilities, Trump Media is nowhere close to being a profitable company or meeting its prior growth projections.
To make matters worse, TMTG closed out 2023 with a paltry $395,011 in cash compared to almost $56.2 million in current liabilities (i.e., payments that'll need to be made within the next 12 months, as of Dec. 31, 2023). This all but assures that rampant share-based dilution is headed shareholders' way in order to keep the lights on in the coming months.
Rather than paying an egregious 1,343 times sales to own a financially shaky stock like Trump Media, investors would be better served buying shares of two cheaper, time-tested social media stocks.
Image source: Getty Images.
Meta Platforms
The first social media stock that's a considerably smarter buy than Trump Media is Meta Platforms (META -2.46%), the parent of the most-popular social site on the planet (Facebook), as well as Instagram, WhatsApp, Threads, and Facebook Messenger.
No social media company has more valuable "real estate" than Meta. The company's family of apps collectively lured 3.98 billion monthly active users (MAUs) to its sites each month during the December-ended quarter. Truth Social is unlikely to have even a fraction of these total MAUs. With more than half of all adults visiting a Meta-owned asset each month, the company typically commands strong pricing power for ad placement.
Aside from its dominant social platforms, Meta's balance sheet is a thing to marvel. Meta closed out 2023 with a whopping $65.4 billion in cash, cash equivalents, and marketable securities. It also generated an impressive $71.1 billion in net cash from operations last year. Having cash-flow machines as social media platforms allows Meta to take risks and reward shareholders -- Meta recently introduced a $0.50-per-quarter dividend -- in a way that no other social media company can.
Don't overlook the potential for Reality Labs, either. Reality Labs is CEO Mark Zuckerberg's project that focuses on augmented reality (AR)/virtual reality (VR) product development, along with various metaverse initiatives. Despite steep near-term losses from Reality Labs, Meta's investments in AR/VR and the metaverse position it to be an on-ramp to 3D virtual environments in the latter-half of the decade.
The icing on the cake is Meta's valuation. Although almost every publicly traded company looks cheap compared to Trump Media, Meta remains historically inexpensive despite more-than-quintupling from its 2022 bear market low. Shares of this industry titan can be scooped up right now for less than 23 times forward-year earnings despite a forecast annualized earnings growth rate of 26% over the coming five years.
The other social media stock that makes for a considerably cheaper and smarter buy than Trump Media is none other than Pinterest (PINS -0.52%).
Pinterest offers an important reminder that MAUs do matter when evaluating social media stocks from an investment standpoint. Following the worst of the COVID-19 pandemic, some workers began returning to the office, which adversely impacted Pinterest's MAUs. In 2022, Pinterest's stock was clobbered as its MAUs shrank or stagnated. Last year, the company's MAUs climbed to a new all-time high of 498 million and its stock has enjoyed a healthy rebound.
What's been critical to Pinterest's success is its ability to monetize its MAUs. Even in a challenging ad environment, ARPU has modestly risen. With almost 500 million monthly active users on its platform, it's becoming easier for Pinterest to command higher ad prices from merchants.
Something else that sets Pinterest apart is its operating platform. Whereas Meta and other social media juggernauts rely heavily on likes and data-tracking tools to help businesses target users with their message(s), Pinterest's entire platform is built on the idea that users are freely and willingly sharing what things, places, and services interest them. App developers making life more challenging for businesses reliant on data-tracking tools is of little consequence to Pinterest, which can serve up targeted data to merchants on a silver platter.
Unlike Trump Media, Pinterest is swimming in capital. It ended December with $2.51 billion in cash, cash equivalents, and marketable securities, and this is after repurchasing $500 million worth of its common stock last year.
Shares of Pinterest can be added to portfolios right now for just 20 times forward-year earnings, which is a bargain considering that analysts expect its profit to grow by an annualized rate of 23% through 2028.
