It Is a Good Time to Take Profits on Digital World Acquisition Stock
InvestorPlace - Stock Market News, Stock Advice & Trading Tips The risks facing DWAC stock have increased, while the shares have rallied. A good time to purchase the shares again...
After Digital World Acquisition Corp. (NASDAQ:DWAC) stock rallied further and the Truth Social app experienced widespread technical issues during its public debut, it may be a good time for investors to take some profits on DWAC stock.
On the valuation front, the shares are getting a bit expensive at this point. And if the app's technical issues aren't fixed within several weeks, I fear that Digital World's shares could sink significantly.
Digital World has agreed to merge with Trump Media and Technology Group (TMTG), which was founded by Former President Donald Trump. TMTG owns the Truth Social app.
Valuation Is Now an Issue for DWAC Stock
Assuming that estimate was correct, at their current level of around $100, the shares would be worth about $2.85 billion.
In my base case scenario for Truth Social, which I explained in great detail in my previous column, I estimated that the value of the shares would be $4.5 billion — or about 57% above their current value — at the end of Truth Social's first year.
There are high regulatory and technical risks that Digital World faces. Additionally, there are meaningfully higher risks that the market as a whole is now confronting. That potential gain is fairly good, but it is nothing to be thrilled about.
The Technical Problems Are Worrisome
Although Truth Social launched at the end of February, it reportedly had significant technical issues. In a statement that was corroborated by multiple, politically objective sources, TechCrunch reported late last month that "most users can't get into the app […] at every step of the [signup] process, TechCrunch received error messages."
I was unable to find any indications that these technical issues have subsequently been fixed. In a Feb. 20 interview on Fox News, Truth Social Chief Executive Officer Devin Nunes said ""Our goal is, I think we're going to hit it, I think […] by the end of March we're going to be fully operational at least within the United States.'"
The statement suggests that Nunes expects the app's technical issues in the U.S. to be mostly resolved by the end of this month, or at least by the beginning of April. By the middle of April, if the problems are not fixed, there is a good chance that DWAC stock will take a big hit.
The Risks Are Elevated
The U.S. government, some state governments, and much of the media — in-line with their actions of the past six years — are probably searching for ways to damage Trump and his businesses. There is a significant risk that these efforts will be successful at any time, resulting in Truth Social taking a big hit or even folding.
Meanwhile, in the last two weeks or so, the risks facing the stock market in general have meaningfully increased. Specifically, it will be harder for the U.S. Federal Reserve to control inflation since oil is above $100 per barrel. And, of course, the risks of a geopolitical catastrophe have risen significantly.
The Bottom Line on DWAC Stock
Digital World's valuation is not nearly as attractive as it was a few weeks ago, while the risks have increased significantly. In particular, the shares could dive if Truth Social's technical problems aren't remedied by the middle of April.
It is also possible that, by that point, some of the consumers trying to access the app may get so discouraged that they do not come back to it, at least for several months. Additionally, the risks facing the stock market have increased considerably.
On a positive note, the fact that Truth Social was the most downloaded app in Apple's App Store on the weekend of its launch partly validates my theory about its huge potential.
Still, in light of the shares' less favorable risk to reward ratio, I recommend that investors take at least some of their profits on the name. I recently sold all of my own shares in the company for $91.30 each.
Assuming that the app's technical issues are completely or mostly fixed within several weeks, it may very well be worth buying DWAC stock again at that time.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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