Summary Trump Media's $2.5B capital raise to buy Bitcoin doesn't address core business weaknesses or create lasting shareholder value. Management's plan to classify Bitcoin as cash or short-term investments violates GAAP and raises legal and accounting red flags. Shares remain extremely overvalued relative to peers, with user growth and monetization failing to justify the current market cap. Absent a massive Bitcoin rally, I see no upside for shareholders and maintain a 'strong sell' rating on DJT. May 27th was not a very good day for shareholders of Trump Media & Technology Group ( DJT ), the company that owns right-wing platform Truth Social. After news broke that management had decided to issue additional stock and convertible notes, shares of the business closed down 10.4%. Even though this transaction will bring a significant amount of liquidity to the company, it doesn't do anything to address its underlying problems. The objective is to use this cash to invest in Bitcoin ( BTC-USD ). This could work out well in the event that Bitcoin prices rise. But anybody who follows my work closely knows how bearish I am about that cryptocurrency. There are some other issues as well. For starters, management seems to be interested in classifying these Bitcoin holdings on the company's books in a way that currently violates accounting standards and would be at odds with the law. This is problematic in and of itself. On top of this, shares of Trump Media & Technology Group remain significantly overvalued as-is and are likely to fall further from where they are right now. For context, since I originally rated the company a ‘strong sell’ in April 2024, the stock has plummeted by 52.1%. That comes at a time when the S&P 500 is up 12.9%. Absent any scenario where Bitcoin prices skyrocket, I see this as just more noise and more evidence that management doesn't really have a solid strategy to grow the company and create lasting shareholder value. Due to these factors, I have no choice but to maintain the company as a ‘strong sell’. A big… and questionable… announcement Shares of Trump Media & Technology Group plummeted 10.4% on May 27th after management announced that it struck a deal to raise about $2.5 billion from a group of 50 institutional investors. This investment will take two forms. The largest chunk of the money, $1.5 billion, will come from the issuance of additional stock at a price of $25.72 per share. This implies 58.32 million shares, which on their own would dilute existing shareholders by 20.9%. On top of this, the firm is issuing another $1 billion of 0% convertible notes. These are senior secured notes that will be backed by the Bitcoin holdings that the company has on its books. There is the opportunity for the notes to be converted at a 35% premium to the price that the shares are being sold for. That would mean an effective price of $34.72 per share. If that comes to pass, it would mean further dilution because of the issuance of 28.80 million shares. For those who are bullish about Bitcoin, and who are also bullish about Trump Media & Technology Group, this development will be perceived in a positive light. In essence, management will use the proceeds from this transaction to create what it calls a Bitcoin treasury. This follows a previously announced special acquisition fund that I wrote about in the past. According to the press release, Chairman and CEO Devin Nunes said that, ‘We view Bitcoin as an apex instrument of financial freedom, and now Trump Media will hold cryptocurrency as a crucial part of our assets. Our first acquisition of a crown jewel asset, this investment will help defend our Company against harassment and discrimination by financial institutions, which plague many Americans and US firms, and will create synergies for our subscription payments, a utility token, and other planned transactions across Truth Social and Truth+. It's a big step forward in the Company’s plans to evolve into a holding company by acquiring additional profit-generating, crown jewel assets consistent with America First principles’. This transaction really just signals to me that management doesn't really have a cohesive strategy for how to grow the business. The entire objective of the company at this point in time should be to grow its user base and improve monetization. This would result in network effects that could make this into a lasting firm. In my previous article about the company, I specifically mentioned that it seemed as though management was just looking to latch on to anything that might stick, with the hopes that it would turn out well. This sentiment was expressed after the company struck a deal with Crypto.com to speculate in cryptocurrency using ETFs on its Truth.Fi platform. That followed another strategy that involved its own Truth+ streaming operations that have since been launched on Roku, Amazon Fire TV, Android TV, Apple TV, and elsewhere. Obviously, if Bitcoin prices rise from here, there could be a positive outcome for shareholders. However, the company does face some other issues as well that are worth mentioning. The first thing that came to my mind was that the business seems intent on violating current accounting standards. In its press release, the company said that it will place Bitcoin on the company's balance sheet alongside existing cash, cash equivalents, and short-term investments. This is a big problem because Bitcoin is not, by definition, any of those things. According to current accounting standards in the US, cash includes currency that a company has, as well as things such as demand deposits with banks or other financial institutions. It can include other types of deposit-related accounts also. It also doesn't meet the definition of a cash equivalent. You see, cash equivalents are short term, highly liquid investments that have specific characteristics to them. For starters, they are ‘readily convertible to known amounts of cash’ and ‘so near their maturity that they present insignificant risk of changes in value because of changes in interest rates’. An example here would be a three-month U.S. Treasury bill. Even when you have an investment that has a short time remaining to it, if the original maturity was longer, such as three years, it still would not meet the definition of cash equivalent. Some might argue that Bitcoin would meet the cash equivalents definition because it is readily convertible to cash and because it's not really tied to interest rates. However, the highly volatile nature of it violates part of this rule. As such, it certainly wouldn't pass the muster of this test. When it comes to short-term investments, it doesn't meet that standard either . To meet the standard, it must be readily marketable, meaning that it can be sold on the public market quickly and without any meaningful loss from said sale. It must be intended to be converted into cash within a single year or within the company’s operating cycle. And it must meet the definition of a financial instrument, which has historically been a debt security, an equity security, or some sort of held-for-trading, available-for-sale, or held-to-maturity investment. But in order to meet the definition of a financial instrument, it has to give the owner a contractual claim to cash or some other financial asset. Bitcoin does none of that. The proper designation under GAAP regarding Bitcoin and other similar cryptocurrencies has been as indefinite-lived intangible assets. Specific examples here outside of cryptocurrency would be goodwill or trademarks. Each year, these must be tested for impairment. This also means that, should there be a plunge in Bitcoin and a subsequent increase in it, the value of Bitcoin on the company's books could end up being significantly understated. Indefinite lived intangible assets can be written down, or impaired, when their prices drop. But they cannot be adjusted upwards. So this is something investors should pay attention to. It's also worth noting that, under the Howey Test, Bitcoin is not considered a security because it fails two of those four prongs. While it does meet the first prong of involving an investment of money, and it also meets the prong of there being an expectation of buyers having a profit from it, it's not an investment in a common enterprise since there is no issuing entity, and it doesn't involve the efforts of others since it is a decentralized faux asset. The SEC and CFTC typically both recognize Bitcoin as a commodity , not an investment. So at the end of the day, the company is going to have difficulty classifying its investment in the way that it hopes to classify it. I suppose that if management puts the Bitcoin into some other structured entity like an ETF or trust, it might be able to include it under the short-term investments category. But that would only be applicable if the investment is intended to be liquidated in a year or less. In that case, any swings in valuation could be measured at fair value and record it as unrealized gains or losses, until such time that the firm finally cashes out of it and realizes said gains or losses. Shares remain insanely overvalued In my previous article about Trump Media & Technology Group, I also decided to value the company by looking at the implied enterprise value divided by the daily active users that the company has. Since then, I have seen an updated estimate that pegs the number of daily active users for the company at 2 million. That's above the 1.9 million estimate that I used in March of this year. Management doesn't report these figures, so we have to use these third-party estimates. Author - SEC EDGAR Data In that analysis, which you can see updated in the table above, the company is compared to other social platforms that are publicly traded. I have also included Twitter on the list since we know its ultimate value at the time that it was sold. If the company were to trade at the same enterprise value per daily active user as these other firms, you would be looking at a downside of between 50.5% and 63.7%. This is even after factoring in this new equity raise, but without factoring in the conversion of the $1 billion of convertible notes. Frankly, I doubt that those notes will ever get converted, given the share price appreciation that would be needed to make that possible. Author - SEC EDGAR Data In the event that Trump Media & Technology Group was achieving attractive growth, and showed evidence that it could generate significant revenue, profits, and cash flows, per user, then perhaps there could be some potential for the company. But in the chart below, you can see that the firm continues to lose significant amounts of cash and, in the most recent quarter alone, it generated revenue of only $821,200. That's enough revenue to buy two of the average homes in the US. It's nowhere near enough to justify an implied market capitalization, following this offering, of $6.43 billion. Author - SEC EDGAR Data Takeaway Based on all the data currently available, it seems to me as though the market reacted appropriately in response to this latest announcement by the management team at Trump Media & Technology Group. Unless you expect Bitcoin prices to skyrocket, I really don't see a way in which this benefits shareholders. The company remains drastically overpriced, and I believe that management's plans on how to classify the Bitcoin it intends to purchase are at odds with GAAP and U.S. law. This only furthers my view that the company deserves a ‘strong sell’ rating.
