Social Fact: Donald Trump is on the cusp of another $1 billion windfall

New York
CNN
—

Former President Donald Trump is on the cusp of a big financial windfall — at least on paper.

As long as Trump Media & Technology Group's stock price doesn't crash spectacularly before the closing bell on Tuesday, Trump is on track to acquire another 36 million shares as owner of Truth Social.

This achievement is on track to be achieved after the market closes on Tuesday.

Even though Trump Media is losing money and Truth Social is very small, the new shares Trump is set to receive will be worth about $1.3 billion At current prices.

Trump's net worth has been on a rollercoaster ride since his social media company completed its deal to go public late last month. The former president is the controlling shareholder of the stock being named “Stock meme on steroids.”

Although Trump Media's stock price has fallen in half since its peak on March 27, it is still trading comfortably above levels that would trigger certain performance provisions in the merger agreement.

according to Securities and Exchange Commission filings, Trump Media can issue additional shares to pre-merger shareholders like the former president if the volume-weighted average dollar price equals or exceeds $12.50 for any 20 trading days during any 30-day trading period beginning on March 25.

The full profit of 40 million shares will be realized if this price measure equals or exceeds $17.50 during the same time frame.

Tuesday is the 20th^y Trading Day Trump Media's stock price has not traded below $17.50 at any time since the clock started on March 25.

“It seems almost certain to me that the profit conditions will be met at this point, given how high the stock price is,” said Michael Olrogg, an assistant professor at New York University School of Law.

The merger agreement stipulates that Trump will obtain 90% of those profitable shares, equivalent to an additional 36 million shares.

This would give Trump a more controlling stake of 114.75 million shares, equivalent to 65% of total shares outstanding, according to filings.

Naturally, Trump Media's share price is subject to extreme volatility, which means the value of this share can fluctuate significantly.

There are also practical and legal constraints that will likely prevent Trump from cashing in on this stockpile anytime soon.

according to filingsthe profitable shares that Trump appears poised to acquire are subject to lock-up restrictions that prevent insiders from selling or borrowing against their shares for several months after the merger closes.

Even if Trump manages to get around this lock-up agreement, experts say it would be difficult for him to practically sell a significant portion of his stake without causing the stock price to collapse. After all, Trump is Truth Social's largest shareholder, chairman, and most popular user.

Although Trump Media's stock price has declined since rising to $66 last month, experts warn that it is still overvalued based on fundamental metrics.

One common way to value a stock is to compare its price relative to its revenue.

The average social media stock trades at a price-to-sales ratio of about 10 times, according to Matthew Kennedy, chief IPO strategist at Renaissance Capital. This peer group includes the owner of Facebook, Meta, Pinterest, Snap, Reddit, and Rumble.

By comparison, Trump Media trades at 1,200 times sales, according to Kennedy.

“The stock appears to be significantly overvalued,” said Jay Ritter, a finance professor at the University of Florida.

Ritter, who has been studying IPOs for four decades, expects Trump Media's stock price to eventually fall to just $1 or $2 per share.

Trump Media's stock price “responds primarily to irrational factors,” said Olrogg, the New York University professor.

For example, Ohlrogge pointed out how the stock fell last week after the company indicated it planned to register new shares.

“There was not supposed to be anything surprising about this filing because it was doing exactly what the company said it would do after going public… There was no real rationale for the negative impact on the price,” he said, adding that the price reflected “the whims of “And the emotions of completely uninformed traders, pushing the price this way and that.”

In a sign of Trump Media's concern about its stock price, the company took the unusual step last week of telling its shareholders how to avoid lending their shares to short sellers who bet against it.

Trump Media has updated the FAQ section of its website to include tips for preventing short selling.

“This is highly unusual,” said Peter Byrne, a securities attorney at Cooley who focuses on companies going public. “We don't usually see companies release information like this.”