Trump Media & Technology Group: Bitcoin Is A Bad Idea

Summary Trump Media’s Bitcoin treasury strategy won’t solve its core issues of weak user engagement, deteriorating financials, and extreme overvaluation. The $2.5 billion capital raise exposes shareholders to high dilution and leverage, making DJT a risky, leveraged bet on Bitcoin’s volatility. Valuation remains unsustainably high, with price-to-sales and price-to-book ratios far above industry norms, driven by a ‘Trump premium’ rather than fundamentals. Despite a possible bull case tied to Bitcoin’s price, I see significant downside and maintain a strong sell rating on Trump Media shares. Co-Authored by Noah Cox and Brock Heilig Investment Thesis Shares of Trump Media & Technology Group (DJT), President Donald Trump’s media and technology company, are down over 30% over the last six months and have fallen by more than 35% year-to-date. While the company is implementing a Bitcoin treasury strategy (that has worked well for lifting share prices of some firms), I don’t think this will work for the owner of Truth Social. Despite some major crypto moves that have garnered a ton of attention this week (thanks to the Bitcoin Conference), the company’s core performance remains poor. Weak social media traffic and deteriorating financials continue to haunt the company and prevent it from growing. Additionally, the lofty valuation is completely out of line with fundamentals, given DJT’s weak user engagement, high costs, and poor financial results. Even with Bitcoin on its balance sheet, this doesn’t change. The newly announced plan to put ~$2.5 billion into a Bitcoin reserve doesn’t solve DJT’s underlying problems. The plan could make the company some money, but there are far too many foundational issues that outweigh a potential Bitcoin treasury. At the end of the day, the company becomes a leveraged bet in Bitcoin. This could work, but I am concerned they will not be able to attract the same financing terms that fellow Bitcoin treasury company MicroStrategy ( MSTR ) has attracted. Notably, since the Bitcoin treasury plan was confirmed, DJT’s stock has fallen over 10%. I think the market is seeing what I am fearing: this won’t work. Shares here are a strong sell. Why I’m Doing Follow-Up Coverage One of the main reasons why I’m doing follow-up coverage on Trump Media Group is because of their new plan to focus on a Bitcoin treasury. To be clear, I think some Bitcoin treasury solutions can work. We’ve seen this plan work with Michael Saylor and MicroStrategy (rebranded as Strategy), who holds more than 550,000 Bitcoin. Unfortunately, I don’t think the Trump Media Group inspires the same confidence. Back in January, the Trump family launched $TRUMP and $MELANIA crypto coins, named after the President and his wife. These quickly dropped in value. I think this has left a bad taste in investors’ mouths when it comes to the Trump family and crypto. To me, it seems like the company is trying to copy the crypto reserve playbook. I don’t think it’s going to work. That is why I am doing follow-up coverage on the company. I am concerned about major dilution/financial strain on shareholders. This follow up analysis is meant to compare Trump Media Group’s strategy to those of successful crypto asset adopters. Bitcoin Reserve Here Is A Bad Idea One of the biggest indicators to me that this plan will fail for the company is because of high leverage and dilution. The company is raising roughly $2.5 billion, consisting of ~ $1.5 billion in new common equity and $1.0 billion in convertible senior notes. Relative to the size of the Trump Media Group, this is an enormous number, and it comes at the expense of shareholders. If Bitcoin’s price doesn’t climb substantially (or worse, it falls), the company could be stuck with a massive amount of debt to repay. Keep in mind for other Bitcoin treasury companies (like Strategy and GameStop ( GME )), the companies committed cash already on the balance sheet before financing more capital for more Bitcoin purchases. With this Bitcoin strategy, the owner of Truth social is now highly susceptible to extreme volatility. Putting a large chunk of corporate treasury into Bitcoin puts the company in a tough spot that exposes them to wild market swings. Bitcoin is notoriously volatile, and critics have long noted that holding a big, volatile asset can risk severe financial losses. This is especially a concern for Trump Media and Technology Group because the company doesn’t have other stable cash-generating businesses. To compare, MicroStrategy has done a fairly strong job of segmenting risk by offering a host of convertible notes, preferred stock, and common shares to help investors buy the security they believe matches their risk preference. While I am not a fan of some of this capital structure, they have done a good job of segmenting risk here. Trump Media and Technology Group has not done this (at least yet). While the company claims that this Bitcoin play will create synergies for subscription payments and use cases within their Truth Social and Truth+ media and social media brands, I just don’t see the use case here. Bitcoin’s use case is not for payments (mainly). This is what stablecoins are for. In essence, they are trying to use an asset called “digital gold” to replace dollar payments vs. stablecoins (industry standard). This feels backwards and not a disciplined approach to crypto. Valuation The Trump Media and Technology Group’s valuation metrics still remain extreme by most standards. The company’s Trailing Twelve Months price-to-sales ratio is currently ~1,269 . When compared to the sector median of just 1.22, this is a steep 103,000% premium to the sector median. Personally, I think this is an incredible disconnect between price and actual revenue. While a Bitcoin treasury can be a strong move, in this case, I think this is a strong indicator that the stock’s current price level is unsustainable. Investors buying shares in this stock are paying over 1,000 times the company’s sales. This type of premium only makes sense if the company has both explosive growth and near-flawless execution, neither of which have materialized (I believe). Currently, their price-to-book ratio is also high. The TTM price-to-book ratio of 5.70 is 190.5% higher than the sector median of 1.96. In practical terms, nearly all of the stock’s market value is built on intangible goodwill, rather than on hard assets or earnings power. If Trump Media shares were to re-rate down to the typical industry price-to-book multiple, the stock would need to drop about 65% from current levels. In my opinion, the valuation premium appears to be almost purely a “Trump premium,” with investors betting on the celebrity and political relevance of the company’s figurehead, rather than any demonstrated business performance. Even with the Bitcoin treasury on deck, I still think these metrics will not improve a lot. On the operating side, costs are growing faster than revenues. For the full year 2024, cost of revenue increased 275% . This means that the company is spending significantly more to generate each dollar of sales, which is a concerning trend. With this, I think shares should trade at the sector median price to book ratio going forward. This would imply 65% downside from here. Bull Thesis Although I’m bearish on the owner of Truth Social, I want to highlight what, I think, is a small potential for a bull thesis here. After the company adopted their Bitcoin treasury strategy, I think this has ironically become their strongest bullish argument. Bulls argue that by raising $2.5 billion to buy Bitcoin, Trump Media has positioned itself as a leveraged proxy for Bitcoin’s price. This means that if you’re very bullish on Bitcoin, owning stock in Trump’s media company could amplify that. If Bitcoin continues to appreciate, the company’s asset base and, theoretically, its stock price, could do really well. On this same front, another point bulls will point out is that this massive capital raise gives the company a war chest that could be used to fund new ventures, acquisitions, or technology development (the primary use of the offering is to purchase Bitcoin). They don’t have to spend it all on Bitcoin. These are all plausible. The reason I am bearish, however, is because I think these are unlikely. At the end of the day, though, there are tough realities that the company has to face. The $1 billion convertible note is essentially a huge bet that must be paid back (or converted) later. This means that if Bitcoin’s price doesn’t rise high enough, the company could end up with a depleted treasury and a large debt to service, putting shareholder equity in a precarious spot. If Bitcoin stumbles, there is absolutely no diversified revenue stream to fall back on, and this worries me greatly. This compares to MicroStrategy, which has a record of successfully refinancing debt. Takeaway While I am overall bullish on the concept of a Bitcoin treasury strategy, Trump Media and Technology Group’s new Bitcoin reserve strategy only strengthens my original bearish stance. The company’s core problems, like overvaluation, declining user engagement, and financial underperformance, remain unaddressed. If anything, I think that management’s decision to take a gamble on Bitcoin highlights a lack of viable solutions for the company. I see significant downside from here. For the company’s share price to make sense, either its social media business would need a strong turnaround, or Bitcoin would need to move much higher. Because of this, I am still a strong sell on shares of the Trump Media and Technology Group.

Source: Seeking Alpha