A leading short seller is warning investors to remain cautious on one of Monday's the top stock gainers. Here’s a look at one of the biggest stocks related to Donald Trump and why it’s moving and what could be next.
What Happened: Shares of Digital World Acquisition Corporation DWAC are surging Monday on reports that former President Donald Trump is nearing an official announcement of his candidacy for the 2024 election.
Digital World Acquisition has a pending merger with Trump Media & Technology Group, a media company owned by Trump that includes ownership of the social media platform Truth Social.
Short seller Jim Chanos may be behind new comments on caution following the surge in Digital World Acquisition shares.
While Chanos has never acknowledged it publicly, he is widely believed to be behind the Twitter handle @wallstcynic. The account often references stocks in which he has admitted owning short positions.
“Once again, $DWAC investors can’t do basic math,” Chanos tweeted from the account Monday.
Chanos used the example of social media company Twitter, which was recently acquired for $44 billion by Elon Musk to illustrate his point.
“If you believe, as I do, that $TWTR would be trading in the 20’s today, ex-Elon’s crazy purchase price, that would value Twitter at $17B, net of cash (@ $25). That’s about 3x estimated 2023 revenues ($5.6B).”
Chanos went on to say that Twitter’s U.S. revenue estimate for next year is $3 billion. The short seller said a good estimate for Truth Social could be $700 million to $800 million in revenue.
“So maybe, if the deal goes through, AND everything else executes well, $DWAC is worth $2.1 billion to $2.4 billion, plus whatever they raise in the PIPE. On 240 million shares at $25 ($6B), see the problem?”
Shares of Digital World have soared previously, hitting a high of $101.87 in March 2022. Investors have largely ignored the valuation of the company and instead used it as a trading vehicle around major Trump-related events.
The Other Big Concern: While Chanos has called into question the valuation of Digital World Acquisition related to the merger with Trump Media & Technology Group, there remains another big question mark.
The SPAC taking the company public has failed to gain enough votes to extend the merger vote deadline. Digital World is seeking to extend the vote to September 2023 to give it time to get over several regulatory concerns and setbacks. Without approval, the SPAC will have until March or face liquidation.
The next shareholder vote is scheduled on Nov. 22, after several postponements of the vote extension. The current deadline is Dec. 8, 2022 with the potential for the SPAC sponsors to pay to extend the vote to March without shareholder approval.
Coincidentally, the latest merger prospectus from Digital World fails to mention Trump Media & Technology Group by name, which could suggest it is preparing to move on or find another target. The company was mentioned by name in an Oct. 11 filing, but was left out of the Oct. 28 filing.
While investors are sending shares of Digital World Acquisition higher on news of Trump’s likely candidacy, the stock could fall closer to the $10 net asset value if a deal is called off or the SPAC doesn’t receive approval to extend the deadline.
DWAC Price Action: Shares of Digital World are up 60% to $28.07 on Monday.
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