Trump defied political norms. Now he tests the stock market.

Ever since its spectacular debut last week, which made former U.S. President Donald Trump one of the world’s 500 richest people, Trump Media & Technology Group has experienced a series of setbacks that would sink ordinary stocks.

But this highly charged social media investment may defy the odds, at least for a time.

Some are calling it a “meme stock,” or one that attracts investors for emotional reasons. In this case specifically, some point to Mr. Trump’s followers who buy as a political statement. Whatever it is, Trump Media is banking on trust in a single individual, Mr. Trump, at least as much as on the potential growth of an entire company. Trump Media owns Truth Social, Mr. Trump’s social media network.

“I don’t think it has to do with economics,” says Michael Klausner, a professor at Stanford Law School. “It’s all just a cult stock. [And] if the cult following is strong enough ... maybe in the shorter run it isn’t risky, because there’s just such a willingness on the part of these people to keep buying it.”

Trump Media first appeared on March 25 on the Nasdaq Stock Market under the ticker symbol DJT, and share prices soared in its first few days of trading – surpassing $79 at one point. Then early Monday, in a regulatory filing, the company revealed it had revenue of only about $4 million last year and posted net losses of nearly $60 million. “The Company’s operating losses raise substantial doubt about its ability to continue as a going concern,” the filing warned.

The stock then tanked, losing 21% of its value in a day and closing just below its initial offering price of $49.95. On Tuesday, the stock rallied a bit, closing at $51.60, just minutes after a Bloomberg report that Mr. Trump was suing two of the company’s cofounders for “reckless and wasteful decisions” that damaged the company. The co-founders, in turn, have sued Mr. Trump for trying to dilute their stakes in the company. 

Inherent risks test market norms

Heavy losses, warnings of possible insolvency, and legal squabbles among the founders would normally send investors running for the exits. As of Wednesday the stock was holding fairly steady, closing at $48.81, down about 5.4% for the day.

As an investment, Trump Media was always inherently risky, in part because it used an alternative way of going public, known as a special purpose acquisition company, or SPAC. SPACs are pools of money raised in the retail and institutional markets specifically to merge with – or acquire – high-growth companies. They allow a quicker and less cumbersome way for those companies to raise money from the public. They also allow individual investors – rather than venture capital or private equity firms that traditionally provide the money for these companies to grow – to get in on the ground floor.

The number of SPAC deals skyrocketed in 2020 and 2021, but the boom quickly faded as most of those companies’ share prices fell. Professor Klausner calculates that as of two weeks ago, 92% of SPACs that have come online since 2019 have fallen below their original offering price. “They’re losers,” he says. “They have systematically dropped in price.”

Whether Trump Media can buck the trend is anybody’s guess. Other legal action is swirling around the company and its initial public offering. The company is under criminal investigation by federal prosecutors, partly because of two payments from little-known entities with ties to an ally of Russian strongman Vladimir Putin, the British newspaper The Guardian reports. On Wednesday, two investors involved in the SPAC taking Trump Media public pleaded guilty to federal charges of insider trading. 

Two other facts stand out about Trump Media. First, it has a very small base compared with its ambitions to compete with social media giants such as Facebook and X (formerly Twitter). When they went public, Facebook had over 800 million active monthly users and Twitter had more than 200 million. Using a much looser definition, Trump Media claims some 9 million people have used it at some point.

Second, the company is way overvalued for its size.

“In terms of fundamentals, this is just crazy and outrageous,” says Minmo Gahng, a professor of finance at Cornell University. Initial public offerings may feature companies with high potential but no profits, which leads to sky-high valuations based on hopes for future profits, but nothing at the level of Trump Media. “The new thing is that this is all about politics.”

Some investors believe that Truth Social will someday reach the same level of popularity as Facebook or X, Dr. Gahng says. Others have put their faith in Mr. Trump himself. Still others are using their investment dollars to support him, Dr. Gahng adds, “almost, if you will, a donation.”

Share price versus fundamentals

This divergence between share price and fundamentals is one hallmark of what people call a meme stock, says Albert Choi, a law professor at the University of Michigan who has studied the phenomenon. 

But in other ways, Trump Media isn’t acting like a meme stock at all. There’s been no great surge of investors rushing to buy the stock as there was for earlier meme stocks, such as GameStop and AMC. The volume of trading in the stock has not skyrocketed. There doesn’t appear to be heavy coordination of investors via social media, even on Truth Social itself.

“I’d be hesitant to call this a meme stock, but we’ll see,” says Dr. Choi. “Bottom line is: This stock is kind of weird.”

Ultimately, the future of Trump Media & Technology Group may depend on the financial realities, as well as how much trust and popularity Mr. Trump can generate going forward. “The value of TMTG’s brand may diminish if the popularity of President Trump were to suffer,” Monday’s regulatory filing warned.