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Trump Media and Reddit advance despite questionable earnings prospects, taking on the role of ‘meme stocks’

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New York City –

Reddit and Trump Media are the first notable social media companies to begin trading publicly in the last five years. They are also, thanks to the rabid reception from investors and the unclear outlook for corporate profits, the latest meme stocks.

Meme stocks are generally shares of companies whose underlying businesses do not justify an increase in their price. The action is often driven by small investors who, for whatever reason, accumulate shares, whether it be a belief that a struggling company can turn around, a disdain for so-called sellers overdrawn – or loyalty to a former president. Or simply opportunism.

Reddit’s IPO last week was the most anticipated debut so far this year, and it didn’t disappoint, rising 48% on its first day. The stock gained another 30 percent on Monday.

Then, Trump Media stole Reddit’s spotlight by jumping as much as 59 percent on its first day of trading Tuesday, before cooling off and closing with a 16 percent gain. On Wednesday, the stock gained another 14 percent to close at US$66.22. Former US President Donald Trump owns a majority stake in Trump Media that could earn him billions.

Analysts and academics liken the rise of Reddit and Trump Media to the 2021 meme stock craze that has boosted shares of companies such as video game retailer GameStop and movie theater operator AMC Entertainment. Although there were differences between the two groups, the companies had two important similarities: It was difficult to examine financial data and predict the path to long-term profitability. But small investors nevertheless joined.

Trump Media lost $49 million in the first nine months of last year, while taking in just $3.4 million in revenue and paying $37.7 million in fees. ‘interests. In a recent regulatory filing, the company said it would lose money “for the foreseeable future.”

Research firm Similarweb estimates that Truth Social received around five million monthly visits in February of this year. For comparison, Facebook saw 15.2 billion visits, while Reddit saw two billion.

Reddit, like its social media peers, relies on user growth and advertising revenue, but it has yet to turn a profit in its nearly 20-year history, which has also been plagued by management turmoil and backlash from users. About 76 million users signed up to one of Reddit’s nearly 100,000 communities in December, according to a regulatory disclosure.

While Reddit and Trump Media may be considered newer tech companies, GameStop and AMC were considered somewhat outdated when small investors latched onto them in late 2020 and early 2021. GameStop has struggled to sell video games and consoles in stores with no digital alternative, and AMC lost billions of dollars as moviegoers embraced streaming and the pandemic kept them from going to theaters.

To be sure, GameStop had the backing of Ryan Cohen, founder of pet food e-commerce company Chewy, who investors likely believed could modernize GameStop’s business. But a number of investors were individuals who belonged to the Reddit Wall Street Bets community and were buying stocks in order to “stick up” to large institutions that had bet that stocks would fall. As the stock took off, more investors saw the opportunity to buy.

Many of those investing in Trump Media are also small investors trying to support Trump or profit from this mania. They helped Digital World Acquisition’s stock more than double this year before its merger with Trump Media, which took its place on the Nasdaq stock exchange. As the stock surged Tuesday, one user urged conservatives to “support DJT stock and send it over $100 per share” to “drive liberals crazy!” »

Data from Vanda Research shows that retail investors bought $6.5 million worth of Trump Media stock on its first trading day and $7.9 million worth of Reddit stock on its debut.

The frenzy surrounding GameStop and AMC has finally subsided. GameStop’s market value peaked at over US$20 billion in January 2021; it now stands at just over $4 billion after Cohen’s announced turnaround largely failed to materialize. AMC’s market value fell from a high of around $29 billion to around $1.5 billion. While both continue — GameStop even reported a small profit for the fiscal year ended in January — analysts are questioning their longevity.

After GameStop’s earnings report was released Tuesday, Wedbush Securities analyst Michael Pachter wrote in a note to investors that a deeper drop in the company’s revenue could lead to significant losses or even bankruptcy.

“If we’re right, GameStop probably has a shelf life of five years or less,” Pachter said.

Still, Pachter is even more skeptical about the fervor Trump Media has generated in the marketplace. He notes that GameStop had revenues of more than $5 billion in 2020, while Trump Media’s revenues are less than $5 million.

“GameStop was the meme stock of a lifetime, but Trump Media shamed it,” Pachter said in an email.

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