Trump SPAC has tripled since the Iowa caucuses

Digital World Acquisition Corp., the blank-check firm that’s been trying for years to merge with Truth Social owner Trump Media & Technology Group, has emerged as a way for investors to make bets on the political fortunes of former President Donald Trump.

The share price of the special purpose acquisition company (SPAC) has exploded in value as Trump’s political rivals drop out of the 2024 race and line up behind him. That’s despite the legal, regulatory and financial questions that have been swirling over the corporate marriage since it was proposed in October 2021.

Digital World’s share price spiked 88% to 19-month highs on Monday alone. That was the day after Florida Governor Ron DeSantis ended his 2024 presidential campaign and endorsed Trump.

The Trump-linked stock tumbled 10% Tuesday morning as residents of New Hampshire began voting in the primary there. But by late afternoon trading the stock reversed course and was up 6% on the day.

Since Trump’s landslide victory in the Iowa caucuses on January 15, Digital World shares have more than tripled.

“After Iowa, it got crazy. This is the only direct-ish way to play Trump,” said Matthew Tuttle, CEO of Tuttle Capital Management.

Tuttle said the stock surge has been purely fueled by momentum and Trump’s political success – not the fundamentals that are supposed to move stocks in the long run.

“There are no fundamentals here,” he said. “This is all investors playing what’s going on with Trump on a blow-by-blow basis, crushing the shorts and creating a short squeeze.”

A short squeeze occurs when investors that bet against a stock are forced to unwind their bets and buy the stock back at a higher price. That in turn drives the share price even higher, creating further losses for short-sellers.

Jay Ritter, a finance professor at the University of Florida, expressed shock at the stock spike for Digital World.

“It’s basically a memestock like GameStop,” Ritter said, noting that the company has “almost no revenue and is hemorrhaging money.”

Despite that, Digital World’s share price values the company at up to approximately $8 billion on a fully diluted basis, which includes all shares and options that could be converted to common stock, according to Ritter.

“It’s so grossly overvalued,” he said.

Neither Trump Media & Technology Group nor Digital World responded to requests for comment.

In November, SEC filings showed Trump Media & Technology Group has lost $31.6 million since launching in early 2021.

The Truth Social owner is burning cash so rapidly that accountants warned it might not survive unless the long-delayed merger with Digital World is completed soon.

Ritter cautioned retail investors that betting on a momentum stock like Digital World could backfire.

“Retail investors are pushing the price around, not based on the profitability of the company now or in the future but a combination of sticking it to the man and perhaps gambling that you can sell it to a greater fool at an even higher price,” he said. “The greater fool theory of investing works in the short-term but as a consistent strategy it certainly does not work.”

Even some professional traders are keeping their distance from the Trump stock given the recent volatility.

Tuttle said he’s not “messing” with Digital World now, preferring to bet on less volatile stocks that are “not going to rip my head off.”

“This is not your widow-and-orphan stock. This is something you don’t play unless you know exactly what you’re doing,” Tuttle said.

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