Why Trump Media Stock Could Be the Most Obvious Short Idea in the Market

Stocks to sell

On March 26, Donald Trump’s Trump Media & Technology Group (NASDAQ:DJT) marked his return to public company leadership. Trump Media stock soared to a high of nearly $80 per share following the debut but trades around $34 now.

With this sort of downside move, investors have to wonder if there’s an affordable way to build a short position in this stock. Basically, there isn’t.

The cost to borrow DJT stock sits at around 234% per the latest data from Fintel, and that’s down from a rate of more than 730% just four days ago. Implied volatility for put options also remains extremely high, making any such bet very expensive to put on.

That said, such a bet may still make sense for short-term traders, given the recent plunges this stock has seen following the release of its 2023 numbers.

Let’s dive into why this may be the case.

A Closer Look at Trump Media Stock

Despite an initial surge to $79.38 on March 26, Trump Media faced skepticism from Wall Street analysts who deemed it overvalued, likening it to “meme” stocks like GameStop (NYSE:GME).

A Trump Media spokesperson highlighted the company’s financial standing, stating Truth Social had no debt and over $200 million in cash, aiming to solidify its position as a free-speech platform.

Still, I think Trump Media stock will be going to zero, or something that approximates zero, in short order. The social media business is incredibly hard, as Elon Musk is finding out.

There are only so many folks that want to listen to the former president’s message and some would argue that base is diminishing. Mainstream platforms will dominate advertising dollars, leaving less for Truth Social and other right-leaning platforms.

The SPAC merger that brought Trump Media stock to the public markets briefly inflated Donald Trump’s wealth to more than $6 billion on paper, but without a way to sell his shares before his lockup period ends, I’m guessing most investors will be out far before then, fearing a flood of new shares coming onto the market.

Why Analysts Say It Will Crash

In a span of two weeks, Truth Social’s debut has seen more turbulence than any of its peers in the stock market. This has made traders question its reliability – such moves aren’t typically associated with healthy companies. Trump’s net worth from this deal has been halved, and there’s plenty more downside likely, according to analysts.

This widespread view appears to stem from the company’s tight association with the former president. His polarizing reputation will mean at least half the U.S. population won’t likely use the platform. Moreover, the media company’s exaggerated fluctuations can be attributed to its initially inflated valuation, which experts find irrational. Stocks with such excessive valuations often lack support when they begin to decline. Despite Truth Social’s significant user decline and minimal revenue in 2023, it debuted with a valuation reaching $11 billion, far surpassing its financial performance.

As noted by Matthew Kennedy from Renaissance Capital, Trump Media’s valuation is exceptionally high. Even if its stock plummeted by 50% daily for a week, its valuation would still far exceed that of its peers.

Avoid DJT Like Plague

Analysts suggest DJT stock has likely attracted primarily momentum traders. These traders could magnify market movements, quickly turning a 4% decline into a 12% drop. According to Kennedy, traders driven by momentum can swiftly sell based on negative news or its absence. 

Companies going public via IPOs or SPAC mergers often face initial volatility due to limited trading history and needing to be more established. Additionally, lock-up restrictions can withhold shares from insiders, impacting market dynamics.

In this case, I think DJT stock is about as cut-and-dried a short position as there is on the market right now. It’s an expensive short, but about as sure a bet as they come. The question is timing the move – that’s what I’m not good at, and why I’m not going to step into a position, given the astronomical cost to borrow here.

On the date of publication, Chris MacDonald 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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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