Digital World Acquisition Group (NASDAQ:DWAC) is likely to fall shortly after the SPAC (special purpose acquisition corp) merger with Trump Media & Technology Group (TMTG) closes. DWAC stock is at an exorbitantly high valuation, especially considering its potential earnings and dilution issues.
This is way too high for a company that has yet to prove it will have any revenue after the merger closes.
Moreover, it is typical for SPAC stocks to crumble post-merger, especially as new warrants and shares can be traded.
The stock is now at $82.88 per share, but once the merger closes its post-merger market capitalization will balloon to over $16 billion.
Where Things Stand With DWAC
Moreover, as one astute Seeking Alpha author recently pointed out the dilution issues in his article, “Why DWAC Might Decline 60% Post-Merger.” DWAC stock will have severe dilution issues.
There will be a flood of new shares and warrants hitting the market. This will start 30 days after the merger starting with various earnout shares for management.
As it stands now, page 5 of the slide deck presentation shows that there could be 193.4 million shares outstanding. This is after the full earnout shares are included. So if we multiply today’s price of $82.88 by 193.4 million shares, the pro forma valuation is $16.03 billion.
But, as the author points out, there could be 10 million to 15 million new shares. They will hit the market once the stock trades over $30 per share for any 20 consecutive days out of 30 after the merger closes.
On top of this, the $16 billion valuation will be 19 times 2024 projected revenue of $835 million. And 2023 revenue is forecast to be just $114 million, putting it on an ultra-high valuation of 141 times revenue.
So, between these two forces, extra dilution, and the high valuation, DWAC stock is likely to fall. Once the merger is closed (the new symbol will change by then) these forces will combine, along with short selling activity, and insider sales to push the stock down.
Where This Leaves DWAC
The Seeking Alpha author rightly points out that there is a long history of SPAC merger stocks dropping after their merger deals close. There is every reason to believe that this could happen with the Trump Media & Technology Group merger as well.
Moreover, a recent Reuters article points out that a Chinese financier group was involved in the formation of DWAC and advised them. It apparently also offered money to help fund the formation of the SPAC group.
This could become grist for the whole anti-Trump mill, which feeds on these stories in both the pro and con Trump industrial media complex. It also, frankly, could complicate things for the merger to close or for the valuation post-merger.
What To Do
Investors should probably tread very carefully here. First one, SPAC merger deals have not kept a very good reputation. Their performance track record post-boom is also “weak,” according to a September 2021 article in Fortune that refers to a Goldman Sachs study.
Second, this particular deal has one major issue that makes it more difficult than other SPAC deals. TMTG is not an operating company yet. Most SPACs are reverse mergers with presently up and running private companies. They tend to have revenue and a good track record already of growth.
Nevertheless, the DWAC SPAC is heavily reliant on the Trump name and mystique, as well as its ability to bring in revenue almost immediately. Certainly, the slide deck seems to assume that this will be the case.
So, if there is any issue with Trump himself, i.e, a sort of key-man risk, either prior to or after the merger, DWAC could have extra risks. Investors should take this into account as well.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.