Is the bubble finally bursting in Digital World Acquisition Corp. (NASDAQ:DWAC) stock? Its recent price drop seems to suggest that the answer is yes.
After running up a spectacular 90% this year, DWAC stock has taken a sharp turn south in recent days. On March 7, shares of the special purpose acquisition company (SPAC) plunged 15%, followed by another 10% decline on March 8.
As of March 11, the stock opened at $71 after slipping lower. The reversal of fortune comes on widespread reports that the company DWAC is merging with — the Trump Media & Technology Group led by former president Donald Trump — is running into some serious problems with its first venture, a social media platform similar to Twitter (NYSE:TWTR) called “Truth Social.”
A Social Media Bust
Truth Social was launched with much hype and fanfare by Donald Trump and his supporters in mid-February. However, since its launch, the social media site that is a near identical clone to Twitter has proven to be a bust. A headline from online magazine Slate sums up the situation best: “Pretty Much No One Is Using Trump’s New Social Media App (Not Even Trump).” The in-depth article states:
“Trump is followed by only 140,000 people, a fraction of the almost 90 million who followed him on Twitter before he was kicked out of there after the Jan. 6, 2021, Capitol riot. According to reports, Trump only has one message, or ‘Truth,’ up on the network: ‘Get Ready! Your favorite President will see you soon!’ He wrote that before the app’s launch and it has 7,750 “ReTruths,” the app’s version of retweets.”
The disappointing performance of Truth Social seems to be making investors think twice about supporting Digital World Acquisition Corp. or the Trump Media & Technology Group that it is to morph into following a reverse merger later this year.
Part of the reason for the lack of participation on the Truth Social platform is that it has been prone to glitches. Additionally, many would-be users who initially tried to join the social media site were placed on waitlists, where many of them remain.
However, the lackluster launch of Truth Social is only one issue facing the fledgling Trump Media & Technology Group. Another issue raising eyebrows on Wall Street is the company’s valuation. The rapid appreciation of DWAC stock pushed its value to nearly $20 billion, making it one of the richest pre-revenue media/technology companies ever to go public.
Another red flag analysts have raised concerns the ties with China. Digital World Acquisition Corp. is backed in part by Arc Group, a privately held Shanghai-based investment firm that’s been investigated on more than one occasion by the U.S. Securities and Exchange Commission (SEC).
Chinese securities and those that have close ties to them have performed poorly over the past year amid a regulatory crackdown on the private sector within China and concerns that Chinese companies could be barred from U.S. markets. Being backed by a large Chinese investment company should give investors further reason to proceed with caution.
Avoid DWAC Stock As It Falls
The swift rise of Digital World Acquisition Corp. was based on one thing — providing former President Trump with a media platform and political pulpit. Truth Social was supposed to be the crown jewel in the Trump Media empire. But that hasn’t happened, and the stock is now falling as a result.
How far it ultimately falls is anyone’s guess. But it is unlikely to return to the lofty heights it was at just a few days ago. And, based on the valuation, the share price was overvalued and due for a correction. As Digital World Acquisition Corp. comes hurtling back to earth, investors should run for cover. DWAC stock is not a buy.
On the date of publication, Joel Baglole did not have (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.