Shares of Digital World Acquisition (NASDAQ:DWAC) continue to run hot in the lead-up to the highly anticipated Feb. 21 launch of former President Donald Trump’s social media app, Truth Social. DWAC stock is on fire. Still, that doesn’t mean you can’t get burned.
On Feb. 1, shares of the special purpose acquisition company (SPAC) jumped 14% in one trading day. At the current price around the $80 mark, DWAC is up nearly 58% so far in 2022. That makes it one of the few securities that has risen substantially this year despite the broad market selloff.
The share price has been gathering steam in the lead-up to the launch of the Truth Social app, which is scheduled for President’s Day. However, despite the big gains in recent weeks, several market observers are cautioning investors against taking a position in Digital World Acquisition. They claim that a crash is on the horizon.
Here’s what you should know moving forward.
DWAC Stock and Trump’s Platform
Having been banned from Twitter (NYSE:TWTR) and other social media outlets, Trump is now launching his own social media app developed by the Trump Media and Technology Group. Digital World Acquisition is taking TMTG public via a reverse merger expected later this year. What’s more, the upcoming launch of Truth Social comes as Trump prepares for another potential run at the presidency in 2024. With no access to supporters via Twitter or other mainstream social media outlets, the former President is taking matters into his own hands.
The big run-up in DWAC stock shows that expectations are high for the launch of Truth Social later this month. A sizable number of Americans continue to support Trump and are behind this new venture. Moreover, a recent Harvard poll found that Trump leads the 2024 Republican presidential candidate field with 57% support among registered Republicans. Florida Governor Ron DeSantis is in second place with 12%.
All told, having the Truth Social app to use as a pulpit in the 2024 election would be beneficial to Trump, should he make another run at the presidency.
Issues with the Reverse Merger
Yet, despite the big gains in DWAC stock, several market observers are warning investors to stay away from the SPAC. The main concern among bears is that DWAC is currently under investigation by not one but two regulatory agencies. The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have both launched separate investigations into the SPAC ahead of its planned reverse merger with TMTG.
Both investigations are looking into whether improper financial dealings and securities violations occurred prior to the Oct. 20, 2021 announcement that Digital World Acquisition would merge with the media company. Should either investigation find evidence of wrongdoing, it could scuttle the planned listing on the Nasdaq exchange. While DWAC says it’s cooperating with the investigations, some analysts say that the stock is a ticking time bomb.
Phillip Braun, a professor of finance at Northwestern, recently published an article titled “DWAC Investors, Watch Out for the Death Spiral.” The article also takes issue with the fact that the SPAC is structured as a private investment in public equity (PIPE) deal that’s highly risky for retail investors prior to the reverse merger taking place. Braun says that investors who want to own shares of the company should wait until after the deal concludes. Several prominent analysts have also warned investors away from DWAC stock.
Avoid DWAC Stock
While Trump supporters are excited about the pending launch of his social media app, they should be careful about investing in DWAC stock prior to the Nasdaq listing. A popular social media app will not necessarily translate into a profitable long-term investment. Plus, there are enough red flags surrounding Digital World Acquisition and its planned reverse merger to give investors pause.
Current shareholders would be wise to take profits and sell their holdings now while they’re in the black. DWAC stock is not a buy.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.