The Digital World Acquisition Corp (NASDAQ:DWAC) share price has erupted. On Wednesday last week, the stock finished trading at a price of $9.95 per share. By Friday, it closed at $94.20. That’s an 846% rise in 48 hours! What was behind this extraordinary growth? And should I be considering this US company for my portfolio? Let’s take a look.
What is this business?
To understand what happened with the DWAC share price, I need to explain what Digital World Acquisition Corp actually is. This is not a traditional business as it sells no products and offers no services. The firm is, in fact, a special-purpose acquisition company (SPAC). These are also known as blank-cheque companies. And they serve as an alternative method for a private business to go public. Let me oversimplify.
The cost of going public via the traditional route of an IPO is actually quite expensive. After all, beyond the legal fees, there are financial service charges to cover, an investor roadshow to plan, and a lot of speeches to give. It’s effectively the investment world’s version of a political campaign.
With a SPAC, all of this can be avoided. When initially established, this unique type of firm issues shares to raise money on the public markets. It then uses this capital to merge with an existing private business. After the merger, the target company replaces the SPAC on the stock market. Consequently, it becomes a public business with virtually none of the expense.
Why did the DWAC share price explode?
Digital Acquisition Corp has found its target private business. And given what happened to the DWAC share price, I think it’s fair to say, investors are pretty excited. The firm has signed a definitive merger agreement with Trump Media & Technology Group. This business was established by former President Donald Trump after he was removed from other social media platforms due to the January Capitol riots.
The company is going to be launching a new social media platform called TRUTH Social. And in the words of Donald Trump, it was established to “stand up to the tyranny of Big Tech”. Regardless of the political aspect, the idea of a new rival social media business does sound like a promising venture. And with deep pockets behind it, leading companies in this space like Facebook and Twitter could be given a run for their money. Therefore, seeing the DWAC share price skyrocket on this news isn’t too surprising to me.
Should I buy now?
As promising as this company may be, I’m not tempted to start buying shares. There still remains a long road ahead. Firstly, while a definitive agreement has been signed, shareholders and regulators still need to approve the deal. But even if this happens, the DWAC share price has unsurprisingly become overinflated by speculation.
The signed agreement places a maximum valuation of $1.7bn. Yet the buying frenzy has pushed the market capitalisation of the SPAC to over $3bn. In other words, investors buying shares are paying a 76% premium for a business they know next to nothing about. That’s not something I’m interested in adding to my portfolio.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
