The Riskiest Social Media Stock of All

Lou Basenese

Thursday, September 1, 2022

Yesterday, I put all social media stocks on blast.

My bearish rationale couldn’t be more straightforward:

Waning growth prospects, quickly deteriorating advertising demand, insurmountable obstacles to differentiate and protect any innovations, and general market saturation.

All these factors compound to create dim sales and profit growth prospects for the entire group.

And as we all know, it always comes down to sales and profit growth. Without them, stock prices don’t rise over the long-term. Period.

With that in mind, I’m convinced there’s one social media stock that’s headed to zero. Well, almost zero. And there’s a low-risk way you can profit from its collapse.

So let’s get to it…

The Real Truth

Just like CNN+ didn’t last long, I’m convinced the same fate awaits social media upstart Truth Social, which is supposed to merge with special purpose acquisition company, Digital World Acquisition Corp. (DWAC).

Why? The list is long…

For one thing, President Trump being allowed back on Twitter would immediately make Truth obsolete.

He has over 88 million followers on Twitter and only about four million on Truth, proving it’s too costly and time consuming to start from scratch. And that most followers don’t actually follow personalities to new platforms.

At the core, this is the most significant fundamental flaw destined to sink the company.

As I’ve explained before, social media platforms are all about the network – specifically, its size and the engagement. The bigger and more engaged the network is, the more advertising sales and profits the platform can generate.

Right now, Truth Social has neither working in its favor. And it probably never will.

That’s simply because compartmentalized platforms don’t work to build engagement. You need opposing viewpoints and controversy, not echo chambers.

More plainly, we don’t have any firm user or engagement numbers from Truth. So essentially, it’s generating $0.00 per user versus as much as $40.00 per user by industry giant, Meta Platforms, Inc. (META).

That’s not a sustainable business, let alone one that justifies the company’s current market cap of nearly $1 billion.

(click image to enlarge)

Too Many Red Flags

Even if we overlook the short-term results and slow launch, it’s important to note that serious obstacles exist for Truth Social to ever crack the code on growth and reach a viable size.

The obstacles include:

  • Limited international appeal for a platform focused and fueled largely by U.S. politics.
  • A standoff with Google over moderation policies, which makes the app unavailable to 44% of smartphone users in the U.S.
  • Ongoing legal and regulatory issues that could derail the proposed merger, and in turn, Truth Social’s access to the cash held by the special purpose acquisition company that’s vital to fund operations. Speaking of cash, it’s clearly a concern, as Truth Social has reportedly stiffed the vendor that provides vital cloud hosting services on $1.6 million.
  • An inability to retain key employees vital to scaling (see here).

Last but not least, I’m convinced that Truth Social is led by a completely ill-equipped and out of his depth CEO in Devin Nunes.

I say that with conviction after engaging in a fiery exchange with Nunes on Fox Business (click below for the replay).

(click image to watch)

Coming off the appearance, I couldn’t help but be overwhelmed by how much he resorted to political talking points over fundamental data points.

While the former is all that matters on K Street, the latter is all that matters on Wall Street. Someone might want to remind Nunes where he works now.

In all seriousness, there’s nothing more painful than a CEO who learns how Wall Street and investors operate “on the job.”

Share prices, and in turn, shareholders, almost always suffer as a result. I don’t expect this time to be any different. And therein lies the opportunity for us…

The Bottom Line

Let me be clear: My take on Truth Social has nothing to do with politics. It’s all about the investment metrics, which just don’t add up.

In short, I believe Truth Social is worth less than the money held in the trust from when the special purpose acquisition company was launched in September 2021, which is about $10 per share.

That means there’s more than 50% downside to current prices, which is too big of a profit potential to ignore. Especially since we can safely boost those returns by 2x or more, as you’ll see in our “Trade of the Week.”

Make no mistake, the announcement of a failure to close the merger would send shares plummeting almost immediately. And it could come next week, as the company is currently conducting a shareholder vote to extend the merger deadline of September 6, 2022.



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Ahead of the tape,
Lou Basenese
Lou Basenese


Tags: Social Media

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