What A Day - How is Trump's Phony Media Company "Worth" $7 Billion?

Episode Date: April 6, 2024

Why on earth is Wall Street valuing Donald Trump’s little social network at $7 billion despite having few users, scant revenue and tremendous losses? This week on “How We Got Here,” Max and Erin take stock of how wonky and meme-ified investment markets have become, what this means Trump’s legal bills, and why “DJT” shares would never be this high if not for Netscape and GameStop. SOURCESTrump Media’s Business Doesn’t Matter - BloombergPump and Dumps Are Legal Now - BloombergJonathan Lebed's Extracurricular Activities - The New York TimesTrump Media stock plunges as 2023 Truth Social loss put at $58 millionOpinion | ‘Dumb Money’ and the Meme Stock Phenomenon - The New York TimesMeme Stocks Are Back. Here’s Why Wild Trading May Be Here to Stay. - The New York TimesTrump Stock Takes Washington by Storm - WSJWho Is Fueling the Surge in Shares of the Trump SPAC? - WSJTrump’s Dazzling Truth Social SPAC - WSJ

Erin, can you do some back of the napkin math for me? Napkin math is the only thing keeping the napkin industry alive, so I am glad to do napkin math. Doing your part. Okay. How is a company with only $4 million in revenue against $62 million in expenses? Okay, plus $4 million minus $62 million equals $58 million in losses. Not great. Okay, but on top of that, there's also no real business plan. There's almost no assets. There are almost no paying customers.

And their financial disclosure include what's called a going concern notice. Which is accountant speak for saying that the company cannot sustainably continue as it has been. Okay, so run all those numbers. Okay. You used to work in finance. How much do you think that company would be worth if it went public this week? I mean, it sounds like you're describing a failing media company. That's a really good guess. That's exactly what it is. Well, when BuzzFeed went public a couple years back, it claimed a valuation of $1.5 billion.

The Try Guys tried it. But traders didn't agree and pushed the share price to a fraction of that. And BuzzFeed's business had better numbers than whatever garbage fire company you're talking about. Okay, okay. So what's your guess? Okay, how much do I think it's worth? Maybe $50 million? A bucket of magic beans? A limited edition Princess Diana beanie baby with the tags attached and in mint condition? I mean, that's worth something.

That's worth real money. Exactly. But I would not invest in this company. Okay, so this is a real company. It did go public last week, and it is now worth, wait for it, $6.7 billion. That is stupid. It is stupid. But you're talking about the Trump Media and Technology Group, right?

Otherwise known as Truth Social. Yep. The barely used so-called social media platform that's just kind of Trump's live journal. Okay. Almost no revenue, big losses, no business plan, and yet $6.7 billion? What is going on? I'm Erin Ryan. And I'm Max Fisher. And this is How We Got Here, a new series where we explore a big question behind the week's headlines and tell a story that answers that question. Our question this week, why on earth is Trump's little social network, despite having virtually no users or revenue and big losses, being valued by Wall Street at nearly $7 billion?

It's a question that's really more about Wall Street and how incredibly weird our investment markets have become than it is about Trump's little dog shit website. It matters because Trump, at least on paper, now has shares of this company worth a couple of billion, which if he can ever convert those shares into cash could cover, you know, a lot of legal bills. Yeah, if's doing a lot of lifting. It is. You hear market analysts refer to Trump media as a meme stock, which is this new phenomenon for the last couple of years. And it is, but that's just part of the story. So the story we want to tell you this week is about a couple of weird, famous stock price run-ups that came before this one and helped to explain it. Altogether, they show why this unconscionable Trump media valuation represents something very new and maybe very destabilizing in the way our financial markets work. Because if you can spin up a multi-billion dollar valuation out of nothing, and that's what this company is, then all of those investors who bought that stock, a lot of whom are just regular people, are going to lose it all when that price inevitably drops.

But when you put Trump Media in context with those other stories, you'll see that in a lot of ways Wall Street has always been a hype factory. A lot of Silicon Valley is arguably built on overinflated stock valuations that kind of look pretty similar to the Trump media thing. We should explain how stocks at the most basic level are supposed to work because it shows how far we've gotten from that. Stocks first became a thing in 17th century Holland as a way to buy a tiny piece of a company. And in return, you got a share of its profits, which are called dividends. You also sometimes get a say in how the company is run. You do. A tiny little say. It's almost hard to believe that this is all it comes down to. Here's an informational video from the 50s trying to get regular people interested in buying stocks.

Why not put your money to work? Put my money to work? That's right, Mr. Finchley. You can own a share of American business. There are over 1,200 companies listed on the New York Stock Exchange. Companies which employ more than 11 million people, produce half of all the goods made in America, and pay about half the nation's dividends. But this, of course, is mostly not how we think about stocks today,

as a way of getting long-term dividends without having to start your own company. Instead, we think of them as more speculative investments, like pieces of a company that we can later resell for more than we paid, as long as the company is still healthy. And this is the thing about speculative stock trading. It's as much about the mass psychology of the market as anything else. It's about vibes, Max. I'm not just betting on the financial prospects of your business when I buy stock in it. I'm betting on what other investors will think it's worth and how they will behave if and when, let's say, demand goes up. Have you ever driven by a restaurant that you know is bad and there's a huge line out

in front of it? Buying stock in that restaurant. And you know that people are just standing in line because there's a line there. They think it must be good. That's kind of what the stock market is. You could also call it gambling. Gambling for guys who went to Wharton. Gambling if the dice were not inanimate little bits of plastic, but rather people, fellow investors driven by a combination of judgment, emotion, and groupthink.

And prone to manipulation. Hey, you call it manipulation. I call it projected future earnings. I call it astrology for dudes. Which brings us to wild stock story number one for this episode, one of the most celebrated tech stock IPOs of the last 30 years. A company that reminds me a lot of Trump media this week. That's right. It's everyone's favorite long-defunct 1990s web browser, Netscape. Here's a documentary on the company's rise called Project Code Rush. At 11 a.m. this morning, Netscape stock went public and Wall Street went bonkers.

Initially offered at a price of $28 a share, Netscape shot up to $72 within minutes. The stock is bid up at extraordinary levels in the first couple of, really, days and weeks of its introduction. It is the biggest initial public offering in, basically, Wall Street history. Here's what's weird about this. When Netscape went public in 1995, yes, it had one of the first web browsers, but it also had no profits. Like most of its customers use the browser for free. Yet investors went into a frenzy so that Netscape ended its first day of trading worth $2.3 billion. Again, without profits. In 1995 money?

Yeah, $1995. Have you ever looked at a screen grab of what the search engine looked like at the time? It's cool. Yeah, I remember it. It looks like a form the government would have you fill out today. It is so bare bones. What was going on is that investors knew that there was a mania for tech stocks. Earlier tech companies had gone public with also vague business plans, but a hot new product. Those companies eventually became profitable, which meant their stock prices shot up.

And so now with Netscape, there's a new hot tech stock and everybody wants it because they think, even though they don't have a lot of reason to believe this, that it might shoot up later too. This is where speculative markets become irrational in a way that's going to help explain the Trump media thing. It doesn't really matter whether you think Netscape will become a successful business. What matters is that whatever you pay for shares today, somebody else gripped by tech stock fever will pay more tomorrow. Beanie babies. Like beanie babies. Seriously.

And we should say investors knew that Netscape didn't really have a business model. Like here's another clip from after the company went public, also from that same documentary project, Code Rush. David Rederman, an analyst for a San Francisco investment bank, closely monitors Netscape's radical plan for investors eager to participate in the Internet stock boom. They still have to show me that behind the vision and the slideware, there's a real sustainable business model that can deliver earnings.

Now, shut up, nerd. Netscape's story after this is a little messy. AOL acquired it, so Netscape investors had their stock converted to AOL stock. Then AOL blew up, and that stock lost most of its value because when a company goes belly up, shareholders are SOL. The point of all this is that people who took at face value that if Netscape stock is high, the company must be valuable, they actually mostly lost their money. The people who won out are the ones who, whether they called it mania or not, treated it as one, buying as the price was rising and then selling before it dropped.

Number go up. Number go up. So yes, some investors got rich off of Netscape, but they didn't get rich from Netscape, which never made any money. They got rich off of other investors. And this is what Trump media eventually taps into, albeit in a different sort of way. Of course, no one in Silicon Valley acknowledges that this is often their business model, but there are these whole ecosystems of angel investors and venture capitalist firms built around this idea that you start a company and your ultimate goal is not to make a profit, it's to hype that company to investors who will bid up the stock price. And then you, the company's founder or

its early investor, will get rich by taking the company public in an IPO or selling it off to a big buyer like Google or Microsoft, not by painstakingly turning a profit by making something tangible that people need and want to buy. We're going to come back to Trump media, but boy, is that point relevant to Trump media, whose business model sure seems to be about playing investors off each other rather than turning a profit. To put it crudely, but highfalutinly, hyper-capitalist autofillatio. That's pretty good, actually. And what's important here is that it's not unusual. Trump Media's grimy, scammy strategy isn't novel. Thanks to the economics of stock speculation, getting investors to drive up your stock price

above and beyond your company's actual value is just part of doing business now. Pretty important part. See? Also Tesla. See Tesla, which creates some perverse incentives in a way that will also be relevant to the Trump media story. So much of our economy is built on the idea

that every asset, whether it's a company or a stock or your home, has a specific value. But in publicly traded markets, that value is whatever everyone believes it is. I used to see this all the time when I worked in finance. Oh, that explains the private helicopter you took to the office today. I would never ride a helicopter.

No, no, no, no, Range Rover only. When I was at Merrill Lynch in 2007, 2008, I was dealing with clients who were seeing their portfolios crater because they own things like Lehman and Countrywide stock. Both places that enough people had decided collectively in their imaginations were worth a lot of money. Countrywide, you might recall, was the company that was underwriting a lot of the subprime mortgages that formed the nucleus of the economic sinkhole that threatened to swallow the entire real estate sector. Right. Up until the moment of the financial crisis, those investments were worth a lot of money. And once everyone agrees that a company is worth a certain imaginary amount of money,

they start making real transactions against that amount, underwriting debt, say, or taking out loans if you're the business owner or founder. But if reality undercuts the imaginary value of a company like Countrywide, the real money thrown after the imaginary valuation starts to become insurmountable. You owe a lot of people a lot of money, and your company isn't actually making you money to pay those people back. But how does that become a bigger problem for it? So let's say my company's stock price has been bid up enormously. I start acting like my company's actually worth what the share price says it's worth.

So I take out loans. I make plans to expand. But then it comes out that a new technology I've been promising for years actually failed its beta test. Oh, no. And investors freak out and a sell-off begins. Now I owe people real money on real loans that I took out when people thought my company was worth a fake amount of money. Thank you. themselves into believing there's a real business here. It's not a mortgage broker like Countrywide basing everything on the market treating mortgages as more valuable than they really are. There's something more fundamental that ties all these together, though, that a company's value is made up. It's made up by the collective delusions of the investment market. People can be pretty

irrational and, dare I say, emotional. And they are often irrational in ways that reflect both the structural economic incentives and the cultural idiosyncrasies of their time. Like GameStop, our next weird stock story, and the one that is getting compared the most to Trump media. It's time to go to the king of cacophony himself. It's time for Jim Cramer. Oh, the mad money guy. I'm seeing short squeezes all over the place.

In many cases, they are actually being orchestrated by motivated young stock buyers who are explicitly trying to crush the shorts using websites that frankly are a lot of fun, but I think are encouraging people to do something that I hope they continue to make money on. They may not. And that brings me to GameStop, the troubled video game retailer. For years, this stock has been absolutely hated because the whole industry's been moving online. So shorting GameStop had been like shooting fish in a barrel. I hope whoever's job it is to clean the spittle off the boom mic

is union and well compensated. Okay, that's enough, Jim. Can you translate that into English for us, please? Okay, go back to 2020. Sorry to ask you to do this. Nobody wants to go back there. It's the pandemic. Many of us are stuck inside with very little to do. And because people aren't going out or traveling,

their spending money is piling up with nowhere to spend it. A lot of people start putting that money into really unsound, speculative investments like crypto. Oh, God, NFTs. Remember people paying thousands of dollars for a JPEG cartoon of an ape wearing sunglasses? I still don't know what NFTs are. I've like had them explained to me and I'm just like, no, my brain does not need to record this. Well, good news for you. They've come and gone. So you never have to learn. It's really just gambling

on purely speculative assets with no intrinsic value beyond the hope that someone else even more bored and reckless than you will pay more for it. And it's around then that an app called Robinhood gets really big. We should say that Robinhood has previously sponsored some crooked media podcasts, but does not currently. So Robinhood allows you to buy and sell stocks without going through a broker or paying a commission. So for people stuck at home looking for an exciting new smartphone game that will give them something to do with the extra pandemic cash, Robinhood stock speculation is it.

So all these online communities form around sharing stock tips. One of the biggest is a forum on Reddit called WallStreetBets. And it's actually not so totally unlike an investment broker dealer, but instead of pros, it's a bunch

of day traders loosely coordinating what to buy and sell each day. In 2021, one of them posed to Wall Street Bets arguing that a company called GameStop is worth more than its listed stock price. GameStop is a brick and mortar video game store, the kind of business that was shrinking before the pandemic and terminal after it. So not only had investors long been selling off any GameStop shares, but they had been shorting it. So we should explain shorts and not the kind that you get frowned at for wearing into the halls of Congress. We should explain stock shorts because it becomes important for the Trump media thing. A short is when you bet that a stock's price will drop. But the mechanics of it are kind of funny.

When you short a stock, you are paying someone who currently owns that stock to borrow it from them for a little bit. Let's say you short a stock at $10. That means you borrow it from somebody who already owns it when the price is at $10. Then you sell that share on the open market for $10. In a few weeks, if you're right, the price will go down to, let's say, $7. You buy it back at that price, then return it to the original owner. You've just made $3, minus whatever fees you paid to the other investor you borrowed it from. So investors are so bearish on GameStop. That means that they believe that GameStop is going to decrease in stock price, that technically 140% of all GameStop shares are being borrowed for shorts.

That's because some of the shares are being shorted multiple times. The Wall Street bets people see an opportunity. If the share price goes up, and they think it will, then holding shorts on the stock will suddenly get pretty expensive. Remember that to close out a short, you actually have to buy back a share of that stock. So if a lot of short sellers have to do this all at once, then it will drive up the price even further. This is called a short squeeze, and it's exactly what Wall Street Bets wants to trigger. Their plan is to buy up shares, wait for the price to rise when the company's performance improves, push it further with more concerted buying,

trigger a short squeeze that will pop the price up artificially and sell for a profit, all while screwing the funds and institutions that hold all of these short positions in GameStop. This, again, is so far within the range of normal, if risky, stock speculation. Yeah, it's not really a meme stock yet at this point. And the plan, we should say, works just about as they'd hoped. But then things spiral out of control. WallStreetB Bets is producing all these memes celebrating their win that make it look really fun. Word gets around the social web that

a bunch of Reddit nerds figured out how to make money from Wall Street fat cats by manipulating the stock market. Although now the stock price is well above its fair market value thanks to the short squeeze, so inevitably it's going to come back down. But millions of web users think it's just a scheme for free money. They start buying up GameStop shares in huge numbers. The price ultimately rose by 3,000%. I know, it's wild. So many people traded on Robinhood that the app had to pause trading to meet its collateral requirements.

At this point, it's no longer a remotely wise investment. It's something that we now call a meme stock, which refers to a buying frenzy driven mostly by social media. Here's a CNBC interview from the midst of that frenzy with an investor named Stephen Weiss. Well, I'm thinking that this GameStop situation is the craziest I think I've ever seen. Usually, you have a short squeeze and it goes up, but this one keeps going. So this really speaks to the changing demographics of investors in the market. And what I mean by that is the people that really true investors never heard of Reddit a few years ago. Sure, it's been around. We know it.

But for that to drive a short squeeze in a company that's so fundamentally flawed, as you pointed 100% last week, 50% today. There's no there there. So that's why I have to be careful. But I do not think that this is a manifestation of a bubble market. I think it's a manifestation of bubble stocks. But we'll see this play out over and over again with others. You can practically hear that guy's bow tie spinning around. He's upset. He's so upset. His monocle keeps popping out. That idea, the greater fool theory, is an important one. It means that when you find yourself foolishly buying an overvalued asset like Bitcoin or a share of GameStop or a house in Silver Lake, your only hope is to sell it to someone else for a bit more. A greater fool. But eventually people will realize that the asset is overvalued,

and the last person to buy it will end up losing all their money. Which is what happened with GameStop. This flood of social media users who jumped in were mostly just bidding against each other, not against Wall Street. And people who bought it, you know, $300 a share, $400 a share, they never got that money back. Like with Netscape, this became a lot of investors making money off other investors. And by the end, those winnings were coming out of the pockets of regular people who hadn't understood what they were getting into or who'd gotten in too late.

So here's a clip from a guy, just a regular guy named Jeffrey Yamada, talking on his YouTube channel about how he'd lost thousands, chasing what he'd been told by Reddit was an unlosable bet on GameStop. I woke up hours after the stock stopped trading and ended the day at $53. So at this point, I was down $18,000. That night, I checked Wall Street Bets and it was chaos. There was no longer a unified front. That was still very entertaining, though. So we are now another big step removed from the core purpose of stocks,

to buy, share, and accompany profits. We're not even at speculative trading anymore, betting on how other investors will buy you a company. These are meme stocks and they're just gambling. They're crypto. They're mobile games where the object is to put your money in while the chart is going up and take it out before the chart goes down. Here's the thing about WallStreetMax. It will find a way to turn a profit off of anything.

And now the meme stock phenomenon has shown that, under the right conditions, huge numbers of people will plow their money into unwise stock trades. Enough people have already lost their nest eggs on meme stocks that the SEC actually produced a commercial warning against them. Welcome back. Brad, it's your investment. I'll take meme stocks. Invest. Your investment, Julie. I'm going to do some research first. Well played, Julie. Well'm going to do some research first. Well played, Julie. Well played.

We can do research. So the phrase for when a lot of people are investing irrationally like this is dumb money. And where there's dumb money spraying around, someone will look for a way to capture it. Enter Donald J. Trump. Mr. Trump increased his net worth by nearly $5 billion after merging his social media platform with a special purpose acquisition company, or SPAC, called Digital World, and began trading under the ticker DJT. It's a great sign of where the people in this country stand. It's almost like a pole, but you see how hot it is. It's one of the hottest stocks that anybody's ever seen. By day's end, the Trump Media and Technology Group, which had produced only $5 million in sales since its 2021 inception, was worth some $8.5 billion. That's surely better than Mr. Trump's margin in Bible sales. All Americans need a Bible in their home, and I have many.

It's my favorite book. Oh, my God. Max, where did you find this low-rent MAGA propaganda? Yeah, that would be the Wall Street Journal opinion page. Okay, like I said, low-rent MAGA propaganda. Yikes. Anyway, Trump Media, which owns Truth Social, went public last week, and despite having virtually no earnings and no customers,

investors snapped up so many shares, it went to $8 billion. This week, a few days after that IPO, Trump media released their 2023 financial disclosures. And those were the really dismal numbers we listed at the top of the show, right? Remember all those losses? And the stock value dropped when that news came out to a valuation of $6.7 billion, which is a big drop, but it's still really high. It gets compared a lot to GameStop. The conventional wisdom is that it's a meme stock. It's dumb money. It's people on social media swarming the stock because they saw memes telling them it would be fun to drive up the price. And there's truth to that for sure. But I feel like it has just as much in common with those tech bubble stocks we talked about, like Netscape. Yeah, investors snapped up Netscape

because they thought someone else would ultimately pay more for it because there was a sustained frenzy for tech stocks. And now there's a different kind of frenzy at play here, but it's still a frenzy. Investors know that there are a lot of Americans who are really eager to own something that will signal their membership in the Trump-supporting MAGA right. A share in Trump media is about $50, which is more than a MAGA hat, but less than those ugly-ass Trump sneakers. I think one difference with GameStop, though, is that there's no plan among grassroots investors to artificially juice the stock to a certain price so that they can then sell it to make money. To the extent that there is a social media push,

it's among people who want to hold the stock because they like owning it as an expression of their political identity, not people looking to pump and dump. And we should say there have been other stocks that basically exist to be purchased by Fox News viewers looking to own the libs, like Black Rifle, the right-wing coffee company, Rumble, the right-wing YouTube clone, Public Square, the right-wing Amazon clone. All of them like Trump media opened high before the stock dropped really hard.

One wave of meme buyers can't sustain an inflated valuation, it turns out. There's another way this reminds me more of Silicon Valley blue chips like Netscape or Uber than it does GameStop. The corporate boards of all white men who believe that taxation is slavery? Close. So remember that Netscape had no business plan. And Uber, of course, lost billions a year for years. Tech investors love these companies anyway because they believed, maybe irrationally, that they at least could one day exploit their market position to become super profitable. Ah, disrupting.

Now some investors think the same thing about Trump media. Not because its technology is any good, but because Trump might become president again. And then who knows what sort of wildly corrupt lovers he'll be able to pull to make his company profitable. Maybe he'll order the State Department to conduct all diplomacy via truth social posts. It's a cynical and evil investing scheme, and it's probably a long shot. But you could say the same about early investors in Uber hoping the company would put taxi drivers out of work. And even if you think that not even all of the corruption at Trump's disposal could turn this piece of crap company profitable, then maybe you still believe that other investors will think that. And so you buy the stock now with an expectation of selling to those people,

the greater fools, in the fall. He doesn't need to do a hit on Jim Cramer's spittle money to get attention. He could just, oh, I don't know, make the stock ticker symbol his initials, like he did back in 1995 when his Atlantic City casino went public. Oh, I remember this. Only to go bust. You remember this? You were a child, Max.

I'm a big, big follower of Atlantic City real estate. Oh, okay, okay. But that's another Wall Street fairy tale for another time. So I guess I'm left with two thoughts on all of this. On the one hand, this Trump media thing does feel like the arrival of something new and maybe kind of seismic in how our markets work. Right-wing meme stocks, you mean, that raise hyperinflated valuations by getting the Fox & Friends set to push their savings into the stock on Robinhood, hoping that small investors in Wall Street will get into an arms race to see who can plow the most dumb money into the pockets of Trump and other right-wing grifters? Right. It's not great. And if this becomes a successful model, it could really multiply the ability of these right-wing Fox News figures to hoodwink people out of their money. But at the

same time, and this is maybe what I'm most left with, is that this is all not as new as it looks. It's actually pretty similar to a lot of what we've seen for years, not just with meme stocks, but all sorts of investor behavior that we accept as normal, especially the huge investor-driven tech boom of the zero-interest era from 2008 to 2022. But that's a form of stock manipulation that we just accept. Yeah, and I can't help but think that the proliferation of meme stocks exposes the overall fakeness of the market. Like the emperor, the emperor not only

doesn't have any clothes on, but he's running in like a streaker with a message written on his chest. He's bragging on CNBC about it. Exactly. He's never wearing any clothes. He's like, I don't wear clothes. And when a large number of people see the stock market for what it really is, which is vibes on vibes, they'll be less comfortable investing their real money into it. I feel like the more that Wall Street looks like a casino and less like a bank, the more Americans could turn to other asset classes that seem to offer a little bit more seriousness and stability, especially as tens of millions of people approach retirement age and don't really have room to be risky anymore.

I mean, I hope that's what they do. But at the same time, lots of forms of gambling are up. And if people see that this is a casino, maybe that makes some people more drawn to it. That's true. We did do a whole episode on sports gambling. Right. Is this just another form of sports gambling? It's another form of sports gambling.

But for me personally, I'm going to stick with REITs for a little while. Let's close out with a clip from a, and I swear this is real, 2009 musical production about another bit of financial trickery gone wrong. The Enron Collapse. I believe in God. I believe in democracy. And I believe in God I believe in democracy

and I believe in the company there's your mirror every dip every crash every bubble that's burst that's you your beautiful stupidity. How We Got Here is written and hosted by me, Max Fisher, and by Aaron Ryan.

It's produced by Austin Fisher. Emma Illick-Frank is our associate producer. Evan Sutton mixes and edits the show. Jordan Cantor sound engineers the show. Audio support from Kyle Seglin, Charlotte Landis, Thank you. Rice and Juanita Tolliver for welcoming us to the family.