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Truth Social valued on virtual hot air, not fundamentals

Donald Trump’s social media network trading at valuations that make some of the most successful listed firms in history look pedestrian

Shares in Donald Trump's Truth Social initially shot up to give the company an early market capitalisation of $8bn even though Truth Social generated only $4.1m in revenue in 2023. Photograph: Will Oliver/EPA

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Karlin Lillington
Thu Apr 4 2024 - 05:00

Even in the no-gravity realm of technology and internet company initial public offerings (IPOs) in which new companies blast into business orbit on pixie dust, the debut of Donald Trump’s Truth Social network last week was, shall we say, unique.

Trump launched Truth Social in late 2021, having been banned from other networks such as then Twitter and Facebook. Since then, one of Truth Social’s more notable features has been bitter infighting among its founders, who have filed various lawsuits against each other. Four cases materialised in the weeks before the IPO, and yet another this week, as Trump sought to blame one of his Apprentice alumni founders for the decline in Truth Social’s newly-minted public shares.

Even for tetchy tech founders — and to be fair, we have a few sue-happy Irish ones, too — founder feuding doesn’t generally erupt in public just as a company is attempting to go public. But this is Truth Social.

Just how crazy is the Truth Social launch? Trump Media & Technology Group (TMTG) shares initially shot up to give the company an early market capitalisation of $8 billion (€7.39 billion) and kept rising before falling substantially by Monday to give a $6 billion market cap, even though Truth Social only generated $4.1 million in revenue in 2023 to set against same-period company losses of $58.2 million.

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When the last figure was revealed in an earnings report Monday, just days after the IPO, shares slumped 20 per cent. “Yeah, Truth Social stock tanked so fast, they’re changing the name to Twitter,” US television host Jimmy Fallon quipped.

Those figures also showed Truth Social made just $750,000 in its last quarter, a 39 per cent fall on the previous quarter, and an amount US business magazine Fast Company snarked was “a tad bit higher than sales for the average McDonald’s franchise” annually. So if Truth Social continues apace, it will offer about the same income as owning four or five large McDonald’s franchises. Except, even a dozen really busy McDonald’s outlets aren’t valued between $5.9 and $11 billion.

That’s the problem with selling actual burgers versus virtual hot air.

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Truth Social is also a tiny platform by comparison with its social media competitors. Analysts estimate the site had between two and five million visitors on its apps and website in February. Analyst Similarweb told CNN it calculates the site had 494,000 active US monthly users on iPhone and Android apps combined in February — those who might be valued most in advertising terms.

App downloads have shrunk, too. While Truth Social had a download spike at launch, with more than two million Apple App Store downloads in the first months of 2022, those have withered to about 40,000 IOS and 57,000 Android downloads in February, according to Statista.

By contrast, Facebook has three billion active users, TikTok, two billion, and newcomer Threads, 130 million. Established media site Reddit, which also IPOd last week, has 160 times the revenue, at $804 million, of Truth Social, and 52 million active daily users. Yet the market valued Reddit at $6.4 billion. That’s still a big success; it’s just that the TMTG insanity makes it look minute.

Let’s define that insanity. Companies are often valued at a price-to-sales ratio — how much investors value the company compared to the sales it generates. Fast Company noted that Truth Social’s price/sales ratio was stratospherically in the thousands, totally untethered from any business basics. Reddit’s, post IPO, was eight. Alphabet’s is six, Meta’s is nine, and current stock market star, the chipmaker Nvidia, has a price/sales ratio of 25 (which was considered astronomical, pre-TMTG initial public offering). Not ... thousands.

Or to put it another way, each of Truth Social’s 494,000 US monthly users might be valued at $11,538, based (modestly) on Monday’s low-end $5.7 billion market cap. That means each user would be expected to generate income to the site worth this amount. As a handy metric, that converts (ahem) to 192 of Trump’s new $60 “God Bless the USA” Bibles per US app user.

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Meta’s monthly active user converts to a measly-by-comparison $367, even though Meta generated $134 billion in revenue in 2023. Even calculating by Truth Social’s two million to five million total monthly users, an individual would still be valued at $1,200 to $2,850 (or between 24 and 57 official Trump $50 Maga caps).

“The stock is pretty much divorced from fundamentals,” according to Jay Ritter, a finance professor at the University of Florida’s Warrington College of Business who has studied IPOs for 40 years and is nicknamed Mr IPO.

In its latest earnings report, TMTG’s auditors said its losses “raise substantial doubt about its ability to continue as a going concern”, though the $300 million brought in by its merger with a shell company pre-IPO will alleviate any immediate threat.

Then again, there’s this caution in TMTG’s IPO filing: “A number of companies that were associated with President Trump have filed for bankruptcy. There can be no assurances that TMTG will not also become bankrupt.”

It’s difficult to imagine any scenario in which there aren’t eventually big losses — some analysts predict the stock will settle at about $2 well below its current level of about $50 or its post-IPO surge peak above $73. In the meantime, expect a wild ride.

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