Why is DJT is a Short Seller's Dream?

Introduction: Setting the Stage

Donald Trump’s re-election has had a sharp,  short-lived surge on multiple stocks including DJT. The spike was due to speculation and sentiment instead of an actual improvement of the company's fundamentals. The volatility was captured because of the stock’s rapid climb after Trump got elected, with a decline showing an overvaluation that is detached from the reality of the stock. DJT’s inflated price is a good opportunity for short sellers to capitalize.

Financial Performance: A Weak Foundation

Over the past couple of weeks, DJT has been on a rollercoaster. On election week, specifically on October 29th 2024, the stock reached a peak value of $54.04, however, there has been a significant decrease over the past month seen in the chart, currently valuing $30.10 as of November 20 2024.. On the same day in 2022, the stock was valued at $21.50, which is seen as growth over the past 2 years. Despite this, the stock is currently on a linear decrease as we get further away from the election week.

DJT’s cash flow is abnormal when compared to its peer companies, Zoom (ZM) and Pinterest (PINS). A company’s investing cash flow portrays the amount of funds it spends to improve the quality of its business and its assets. ZM has invested $1,332,277 over the past year while PINS has invested $231,089. Comparing these values to DJT’s investing cash flow of $2,200 per year indicates that very little of its revenue goes into improving the quality of its service. Additionally, looking at a company’s cash flow from financing activities shows how much a company has either generated or used from its financing activities. Companies with negative cash flow values likely use their cash to issue equity to their shareholders, an action that ultimately increases the company’s profits. Once again, ZM and PINS have negative financing cash flows of -$379,988 and -$872,754 respectively while DJT has an overwhelming $2,500,000 financing cash flow. As peer companies use their money to develop their applications, DJT will experience little improvement, leading it to become obsolete. 

Market Reaction and Political Influence

In days leading up to the election, the market exhibited caution due to uncertainties surrounding the outcome of the election. Major indices remained flat while investors awaited clarity on future economic policies. The day after the election, November 6, U.S. stocks climbed to record highs. The DJIA surged by 1200 points, marking its best day in two years. This surge was driven by the expectations of tax cuts and deregulation under the renewed Trump administration. Despite the initial surge, momentum began to decline in the following days. On November 12, 2024, the S&P 500 had decreased by 0.3%, and DJIA had fallen by 0.9%. The result of the pullback was attributed to the profit-taking and reassessment of the potential impact of Trump’s policies. As of today (November 20, 2024), the market has stabilized with most major indices maintaining the initial gains from the post-election surge. Political influence alone cannot sustain DJT’s stock value because it fails to address the critical components of long-term business growth. While political ties can offer short-term benefits, such as favorable policies or increased media attention, they do not create sustainable, scalable business practices or a solid foundation for revenue generation. A successful company requires a strong market position, innovative products, solid financial performance, and strategic management factors that transcend political influence. Without these fundamental drivers, DJT's stock value would struggle to maintain consistent growth, as it lacks the resilience needed to withstand market fluctuations and changing political climates. Long-term success in the market is built on operational strength, not political connections alone.

Streaming Expansion: False Hope?

Truth+ uses a phased launch. The initial service integrates linear TV streaming on Truth Social’s web platform, with planned expansions to apps and TVs. The integrated its linear TV streaming into a content delivery network (CDN). This infrastructure is designed to make the platform "uncancellable" by utilizing technology for servers, routers, and software. Truth+ focuses on smaller markets that are unconsidered by mainstream media, including news, Christian programming, family-friendly content, and commentary. Even though the company focuses on building a unique ecosystem, the platform faces challenges in monetization. Despite this, a loyal ideological user base could result in continued initial subscription. However, it is nothing compared to Netflix's Massive global scale with over 230 million subscribers, deep library of original content, and better data analytic algorithms for user activities.

Overvaluation Metrics

DJT has an enterprise value of around $5.82 billion and around 2 million daily active users, giving it an EV/DAU ratio of approximately 2,910. This figure outshines any other competitor in the social media space. For comparison, META (Facebook, Instagram, WhatsApp, Threads, Messenger, and Oculus) has an EV/DAU ratio of around 430 with 3.29 billion DAUs, while Snapchat has a ratio closer to $100 with 414 million DAUs. Similarly, prior to becoming a private company, X (formerly Twitter) had an EV/DAU ratio of about 200 with 245 million DAUs. The extreme disparity between DJT and its competitors strongly suggests that DJT’s current valuation is driven by speculation rather than actual performance.

With just $3.37 million in annual revenue and a negative net income (-$372.39 million), the company incurred substantial losses. This is reflected in its ROA (ttm) of -21.32%, indicating losses relative to its assets over the trailing twelve months. Its price-to-book ratio stands at 7.92x, significantly higher than the traditional peer group average of 1x to 2x, meaning far more value is placed on the stock than the actual value of its assets. Worse still, its enterprise value-to-revenue (EV/Revenue) ratio is an unbelievable 1420x, well beyond the norm for the technology or media sectors, where levels below 10x are considered reasonable.

In general, DJT is severely overvalued, making it a risky investment. While popularity may drive attention to the company, its financials indicate it is not living up to its high valuation. This makes DJT an attractive short-selling opportunity, as its inflated value is unlikely to withstand market recalibration.

Short-Selling Dynamics and Risks

Shorting DJT involves borrowing the shares, selling the stocks at the current price, and repurchasing the stocks later, ideally at a lower price to profit from that stock. Borrowing those shares usually means you acquire loan fees which can sometimes be high due to the demand to short the stock exceeds. Also, margin interest applies if you are using borrowed funds, which causes the cost to increase. Additionally, DJT is closely tied to President-Elect Donald Trump, making the stock extremely volatile due to his political and legal developments. Events like the election in which the stock went up 1.200 points, can create price swings. A high short interest can create a short squeeze where rising prices force shorts to lose money. This is frequently shown through politically tied stocks with very low liquidity. People who are short can face unlimited losses because stocks can rise indefinitely, but the lowest a stock can reach is zero. If you short something for a long time, this can create more fees, erasing the profits made. To manage this you have to plan carefully and use tools like options to hedge exposure. Another solution to this is buying call options which can put a cap on losses. Finally, using stop-loss orders helps limit losses when the stock enters a price increase. Traders also should regulate their position size to avoid overexposure on high-volatility stocks. Finally, staying in the loop on political and legal developments is crucial as it heavily influences DJT’S stock price.

Case Study: Lessons from Meme Stocks

DJT shows similarities to past meme stocks like GameStop and AMC, which surged due to speculative retail trading driven by social media hype rather than business fundamentals. GameStop skyrocketed from under $20 to over $400 in 2021, and AMC gained 500% during the same period, both fueled by short squeezes and viral campaigns. If DJT’s rise is similarly speculative, it risks following the same trajectory of irrational valuations and sharp corrections, underscoring the volatility and potential pitfalls of hype-driven trading.

The Cultural and Political Factor

Cultural and political loyalty to Trump can boost DJT stock prices and lead to delayed declines. This is primarily due to investor’s enthusiasm for Trump’s current virality and the media amplifying Trump’s image now that he has won the election and is now making decisions for office. We believe this loyalty will remain as long as Trump sustains his virality and publicility in the media as financial fundamentals eventually come into play with investors. In conclusion, after some time, DJT will require a viable business model to obtain consistent revenue to keep their boosted stock prices and delayed declines instead of relying on ideological attachment. 

Conclusion: Why DJT is the Perfect Short

DJT is the perfect opportunity for going short, revealing a high-reward opportunity. Lately, DJT has displayed weak financials, causing doubt about its upcoming performance. Most recently, DJT reported third-quarter earnings to be stagnant as the company fails to grow its business and brand. DJT is also overvalued. This is due to the temporary spike in value based on speculative sentiment from the election. However, in agreement with their financials, this inflated value will not hold. Ultimately, taking a short position in DJT will be a high-reward opportunity in accordance with their unsustainable valuation and weak fundamentals.