The stocks and warrants of Digital World Acquisition Corp., the special purpose acquisition company merging with Trump Media & Technology Group, tell two different valuation stories. Shares of SPAC have traded around $80 in recent days, preserving a 700% rally since the deal was announced in October. They’ve risen more than 60% this year, thwarting a broad selloff that sent down other SPACs and stocks popular among individual investors, such as GameStop Corp.
The current share price implies a multi-billion dollar valuation for Mr Trump’s startup, a remarkable figure given that little is known about the company other than the fact that it plans to launch a new social media platform called Truth Social and to capitalize on its followers. The company said in December it had $1 billion in investor commitments under its SPAC deal and California Republican Rep. Devin Nunes was leaving the House of Representatives to become the company’s chief executive. .
While stocks and options that allow the holder to buy more shares at a specific price in the future have surged, Digital World-linked warrants have lagged, baffling some traders who say they are mispriced relative to the stock and who expected the gap to close. .
Warrants are similar to options but come from SPAC. They can only be exercised after a company’s SPAC agreement has closed. Warrants generally have an exercise price of $11.50, which means the holder would pay $11.50 to receive one share of the company.
But DWAC warrants are trading around $27, compared to $80 for the stock. Some analysts say they are undervalued because assuming the deal closes with the stock price around the current level, warrant holders would pay $11.50 per share and could immediately sell at the market price several times higher. By this logic, some analysts say the warrants should trade roughly at the stock price minus $11.50, or in the high $60s, instead of the high $20s.
Several factors are likely holding back warrant prices, traders said, namely uncertainty that the stock’s deal will close at current levels. Trump Media & Technology Group has yet to release its financial and ownership structure before the deal can close and the warrants can be exercised. This process can take several months and could show that Mr. Trump’s business is far from becoming a profitable business. The Securities and Exchange Commission is also investigating the merger.
The gap between stocks and warrants is evidence that individual investors are pushing up more well-known stocks and options, some analysts said. Digital World stock symbol DWAC has been trending on some social media platforms in recent weeks and its trading volumes have at times been on par with much larger companies.
“It’s the meme stock of all meme stocks because it’s Trump,” said Matthew Tuttle, whose firm Tuttle Capital Management manages a few SPAC exchange-traded funds. Meme stocks are gaining popularity among online marketers for reasons other than their business prospects, as GameStop and others did last year.
According to data from Cboe Global Markets, call options tied to DWAC shares which jumped to $90 or $100 have been among the most traded in recent days.
More sophisticated traders are likely trading the warrants, analysts said, tempering their expectations of where the stock will trade when the deal closes. The price of the warrant is still unprecedented for SPACs and implies a valuation of Trump Media & Technology Group in the billions, albeit much smaller than the stock price. The reported valuation of the deal in October was $875 million, including debt.
The $1 billion investor commitments for the company announced in December were also based on a steep discount to the current share price, potentially offering those investors a risk-free profit if shares remain high.
Traders who expect the spread between stocks and warrants to close in the coming months could buy the warrants and try to short the stock by borrowing stocks, selling them and seeking to buy them back at lower prices.
The challenge is that DWAC’s wild trade has pushed stock borrowing fees to exorbitant rates, according to data from technology and data analytics firm S3 Partners. These high borrowing costs are one of the reasons why the number of stocks sold short is still relatively low, even though it has increased recently, according to investors.
A SPAC such as DWAC is a shell company that raises funds and begins trading publicly for the sole purpose of merging with a private company to take it public. After a merger is announced and the deal is approved by regulators, it closes and the private company replaces SPAC on the stock market.
These deals have become popular alternatives to traditional initial public offerings since 2020, in part because they allow for trade projections that aren’t allowed in IPOs. Shares of many SPACs surged alongside meme stocks early last year but have since fallen as investors braced for higher interest rates and pulled back from speculative trading.
Still, Digital World shares remain high, baffling many on Wall Street.
“It’s hard to fathom,” said Julian Klymochko, who manages a SPAC-focused fund at Accelerate Financial Technologies.
Never miss a story! Stay connected and informed with Mint. Download our app now!!
