Achi news desk-
New York
CNN
–
Don’t blink. You may miss a huge move in Trump Media & Technology Group’s stock price.
The owner of Truth Social has only been public for two weeks but has already sent traders on a stomach churning ride. Gravity-defying spikes in the share price have been followed by earth-shattering crashes. Trump Media is so turbulent it makes bitcoin volatility look tame.
This extreme upheaval has caused wild swings in the net worth of the company’s largest shareholder and chairman: former President Donald Trump. His net worth has plunged by more than $2 billion since Trump Media’s closing price on March 27, the day after it went public. On one particularly bad day alone, Trump’s net worth increased by $1 billion.
There are many reasons why Trump Media shares have been so volatile, including the fact that the company inextricably linked with the former president. His name recognition, polarizing political nature and close association with the company have captured the attention of retail investors, professional traders and the news media, creating a volatile environment for the stock.
“Because it’s Trump, this thing is going crazy,” said Matthew Tuttle, CEO of Tuttle Capital Management, adding that it’s far too volatile for retail investors to buy the stock long-term or bet against him.
In Trump Media’s first nine trading days with the ticker symbol “DJT,” the stock has moved up or down at least 5% each day. More than half of the days it has moved by double digit percentages.
That is not normal.
Trump Media’s daily stock performance has a standard deviation of about 13%, according to Michael Ohlrogge, an associate professor at NYU Law School. That is more than six times the average over the same period for companies with a similar market valuation.
‘Untethered’ to essentials
One reason Trump Media moves so much more than a typical stock is because it achieved such a profitable valuation when it went public that experts say it defies logic. And stocks with ridiculous valuations tend to be more volatile, with little support once they start to dive.
Truth Social’s US monthly active users on iOS and Android increased 51% year-over-year in February, according to Similarweb.
Trump Media lost $58 million in 2023 and generated very little revenue: just $4.1 million that year. Yet it was sold for as much as $11 billion the day it began trading.
“This stock appears to be fully engaged in fundamental value,” Ohlrogge said.
Here’s how high Trump Media’s valuation is: Even if the stock price dropped 50% every day this week, it would still be valued far richer than any of its peers, according to Matthew Kennedy, senior IPO strategist at Renaissance Capital.
One common way to value stocks is to measure their price-to-sales ratio. Kennedy pointed out that a 50% drop each day this week would leave Trump Media with a market valuation of about $173 million. That would equate to around 40 times the company’s 2023 revenue. In comparison, Reddit trades at 11 times trailing revenue, Facebook owner Meta trades at 10 times and Snap four times. Even Rumble, the video platform that describes itself as “immune to cancel culture,” is trading at 22 times sales.
“A company with the least revenue doesn’t have a lot of underlying cash,” Kennedy said.
Very few shares trade
Another factor: Analysts say Trump Media’s shareholder base likely includes a significant number of momentum traders. Those traders can amplify market movements, turning a 4% drop into a 12% one – and vice versa.
“Traders who buy momentum will just as quickly sell momentum. Any piece of negative news can trigger sales, or even the lack of news,” Kennedy said.
Another factor is the fact that Trump Media is a new stock.
Companies that go public through a traditional initial public offering (IPO) or through a merger with a special purpose acquisition company (SPAC), as Trump Media did, tend to experience bumpy ride at first.
That is partly because there is not much trading history and these are less established companies. Additionally, a chunk of the shares are stuck on the sidelines due to lock-up restrictions that prohibit insiders from selling their stock.
That issue has been magnified with Trump Media. The former president alone owns 78.8 million shares and can’t sell that stock anytime soon.
Trump Media has nearly 137 million shares outstanding. However, its free float – which measures the number of shares potentially available for trading – is only 40 million, according to Refinitiv.
The actual number of shares changing hands is likely to be even less, exposing the stock to high levels of volatility.
People who want to shorten it can’t
The small float makes it very difficult for skeptics who want to bet against Trump Media to do so.
To short a stock, a trader must first borrow shares elsewhere. But that has been nearly impossible with Trump Media because it has been too expensive.
As of last Thursday, Trump Media was easily the most expensive stock to borrow among those with more than $50 million in short interest, according to S3 Partners.
Bob Sloan, managing partner at S3 Partners, told CNN that this difference shows that speculative bearish investors see a “high probability” that the stock will decline in the short term.
“The lending rate is crazy,” Tuttle said. “At one point, it was almost impossible to make money shorting it because the stock could go to zero and the lending rate would erode all your gains, which is crazy.”
Not only is the supply of shares to borrow very low, but demand is high because some market veterans believe it is overvalued.
“People really want to shorten it. That increases the lending rate exponentially, which then makes it very difficult to short,” said Tuttle, who tried and failed to short even just $100 of stock from his Charles Schwab account today Photo and was unable to do so because there were not enough shares available.
This dynamic makes it easier for investors to place bullish bets, sending Trump Media shares soaring.
“At some point, retail guys are going to pump this up. We could be sitting here tomorrow and it could be trading at $70,” Tuttle said.
Usually, when stocks rise above their fundamental value, short sellers swoop in and drive it back down, making a profit along the way. But that has been more difficult with Trump Media, allowing its stock to soar in its early days.
“There is no routine check on unreasonably high prices,” said Ohlrogge, the NYU professor.
The Trump factor
All this is magnified by the Trump factor: The fact that this company is inextricably linked to the popularity and political fate of the former president.
“If this wasn’t DJT but my initials MBT, this thing would trade for money,” Tuttle said.
In some ways, the stock has become a vehicle for people to bet on Trump’s political fortunes.
“The company is worth some money if Trump becomes president and a much, much lower amount if he doesn’t,” Renaissance’s Kennedy said.
Some people are betting on or against the stock just because of their feelings about the former president. And that debate is playing out in real time.
Jonathan Macey, a professor at Yale Law School, said this division helps explain the tug-of-war in the market.
“There are Trump supporters who see a big balloon rising and think it will never come down to earth,” Macey said. “There are sophisticated investors, who understand things like gravity, and are betting on his quick return to earth.”
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