Trump’s Social Media Stock Could Mirror AMC’s And GameStop’s Slides

AMC and GameStop are probably the two most well known meme stocks. They both caught fire in early and mid-2021 as individual investors helped to create short squeezes. At their peak 2021 closing highs they were up 2,850% and 1,745%, respectively, vs. their December 31, 2020 closing prices.

While they are still up 610% and 420% from their respective December 31, 2020, closing prices, reality has caught up with them, to some degree, as they are down 76% and 72% from last years closing highs, respectively. These include declines of 45% and 34% so far this year, respectively.

It should be noted that AMC and GameStop are both expected to lose money in 2023 and are trading at market cap to revenue multiples 10 times and 6 times higher, respectively, before Covid-19 hit. If their valuation multiples continue to decline their shares could easily be down over 90% from their 2021 peaks.

Trump Social Media shares valuation has to use 2025 revenue estimates to make sense

Currently DWAC has a market cap of $2.6 billion. Since Trump social media company has no revenue the only forecast available is what the company presented in an SEC filing. With projected revenue of $1.84 billion in 2025 its market cap to revenue ratio is 1.4x, which essentially matches AMC’s and GameStop’s current valuation metrics of 1.4x and 1.3x, respectively.

Keep in mind that besides no revenue DWAC has no infrastructure to generate revenue. It would not be surprising to see these revenue estimates decrease as time goes by and if AMC’s and GameStop’s stock prices decline, dragging down their valuation metrics, it would make DWAC’s look even worse in comparison.

How far could Trump Social Media’s stock fall

In a quote widely attributed to Warren Buffett, “the stock market is a voting machine in the short-term and a weighing machine in the long-run.” This can be applied to AMC, GameStop and Trump’s DWAC.

DWAC’s stock started off as a SPAC or Special Purpose Acquisition Company. It was trading at $9.96 on October 20, 2021, the day before it was announced that it would be merging with Trump’s social media company. Two days later on October 22 it got as high as $175.00 and closed at $94.20.

While DWAC is down 61% from its all-time high of $175 and 27% from its closing high of $94.20, it has risen by 25% this year from $51.43 to $68.75 as of Friday. This compares to AMC and GameStop’s stock falling significantly this year by 45% and 34%, respectively.

If DWAC were to fall the same percentage as AMC and GameStop have from their closing highs DWAC would decline to $22.68 to $26.54. While this would still be significantly higher than the $9.96 it was before the merger with Trump’s company was announced, it wouldn’t take much more to fall to the $9.96 or lower due to AMC or GameStop’s valuation falling or DWAC falling short of its revenue projections. A combination of both would certainly hurt the stock.

AMC’s valuation still high

Before Covid-19 hit the economy in 2020 AMC had lost money and had negative free cash flows two of the three previous years. Trying to use earnings or cash flow as a valuation tool would show exorbitant results and not be of much use. Probably the best metric is market cap to revenue.

• Dec. 31, 2017: $1.58 billion with $5.08 billion in revenue = 0.31x market cap to revenue
• Dec. 31, 2018: $1.48 billion with $5.46 billion in revenue = 0.27x market cap to revenue
• Dec. 31, 2019: $747 million with $5.47 billion in revenue = 0.14x market cap to revenue
• Dec. 31, 2020: $248 million with $1.24 billion in revenue = 0.20x market cap to revenue
• Dec. 31, 2021: $14.0 Billion with $5.47 billion in revenue = 2.6x market cap to revenue
• Jan. 28, 2022: $7.7 Billion with $5.47 billion in revenue = 1.4x market cap to revenue

To remove the impact of Covid-19 lets use 2018’s and 2019’s revenue, which are essentially the same, of $5.47 billion for 2021 and 2022’s market cap to revenue calculations.

At AMC’s current price of $15.06 shares are 10.4 times more expensive than 2019’s valuation level. It wouldn’t be surprising to see AMC’s continue to fall.

GameStop’s valuation also has room to drop

Before Covid-19 derailed the U.S. and worldwide economies GameStop was slowly losing revenue from fiscal 2016 to 2018 then had a sharp drop-off in fiscal 2019 (ended in January 2020). GameStop may be able to shake up its business enough to recover at least some of downturn but it won’t happen overnight.

• Fiscal 2016 revenue: $8.6 billion
• Fiscal 2017 revenue: $8.5 billion
• Fiscal 2018 revenue: $8.3 billion
• Fiscal 2019 revenue: $6.5 billion
• Fiscal 2020 revenue: $5.1 billion
• Fiscal 2021 revenue: $5.97 billion estimate
• Fiscal 2022 revenue: $5.90 billion estimate

Note that while GameStop’s last fiscal year ended on January 30, 2021, and would normally be labeled fiscal 2021, GameStop calls it fiscal 2020.

When calculating the company’s valuation metrics these results use fiscal 2018’s $8.3 billion in revenue so as to be as generous as possible.

• At Friday’s close of $97.91
• GameStop has a market cap of $7.5 billion
• Which is 5.9 times greater than December 31, 2020’s market cap of $1.3 billion
• And 0.9x market cap to fiscal 2018’s revenue
• Vs. 0.15x at December 31, 2020