Truth Social, owned by Trump Media & Technology Group Corp (NASDAQ: DJT), has seen a lot of ups and downs since going public in March. After its IPO, the stock hit a high of $79.38 but then dropped to $22.55 over the next month. Recently, it bounced back by as much as 138%, closing at over $54 last Thursday before dipping to $50.99 on Friday.
The stock’s volatility is due to two main reasons. First, the company’s initial high valuation after the IPO was too optimistic. At its peak, Truth Social was valued at over $8 billion, even though it only made $751,000 in revenue for the quarter ending in December and had a $9 million loss.
For comparison, Reddit Inc. (NYSE: RDDT) is also valued at around $8 billion but reported $249 million in revenue and $18.53 million in profit for the same period, with 73 million monthly users compared to Truth Social’s five million.
This unrealistic valuation led to an almost 80% drop in Truth Social’s stock. Many IPOs see a quick rise as investors rush to buy shares, but this can lead to a quick drop when those investors sell off. This happened with DJT, as short-term investors looking to make quick profits sold their shares, causing the stock to plummet.
Another reason for the volatility is that many investors took large short positions, betting that the stock would fall. The combination of an inflated valuation and political opposition led many investors to short the stock, contributing to its initial decline.
When investors short a stock, they sell it first, causing the price to drop. They make money when they buy it back at a lower price. If many investors short a stock, it can cause a temporary price drop. However, these investors eventually have to buy the stock back.
If the stock price doesn’t drop as expected, these investors can face unlimited losses as the price rises. This situation is known as a “short squeeze.” Notable examples of short squeezes include GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC) in early to mid-2021, which saw their stock prices soar by over 1500%.
DJT, the company behind Truth Social, has been using similar tactics to keep its stock price up. The CEO, Devin Nunes, has been making statements blaming the stock’s decline on short selling. He has been advising shareholders on how to hold onto their shares, sending letters to Congress for an investigation, and informing Nasdaq about suspected stock manipulation from naked short selling.
As of April 30, there were 5.35 million shares sold short, which means $272 million worth of stock needs to be bought back eventually. The short interest has doubled since February and continues to rise.
Another factor in the recent stock climb could be the growth of the Truth Social platform. In February, the platform had around five million website visits. In March, the same month DJT went public, visits increased by over 55% to 7.74 million. In April, visits decreased to 6.5 million, but this is still a 30% increase from February. With more publicity from Trump’s ongoing trial and the upcoming election, the platform might continue to see a surge in users.
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