How can Donald Trump’s loss-making Truth Social be worth $9bn?

Donald Trump’s social network went public on Tuesday and quickly achieved a valuation of almost $8bn (£6.3bn), a gain of more than 15% on its initial public offering (IPO) value. Shares rose again in volatile trading on Wednesday, rising 14% and valuing it at $9.6bn. That enormous success has raised questions, and not all of them are easy to answer.

How can it possibly be worth $9bn?

The glib answer is “because the most recent price someone bought a share of the company at is $66.46”. The valuation of a publicly traded company such as Truth Social – officially, the Trump Media & Technology Group Corp, with the stock ticker DJT, referencing its founder’s initials – is just a product of multiplying the value of an individual share with the number outstanding.

Typically, that value, known as the market capitalisation, is kept in check by reference to the “fundamentals” of the company: how much money it makes or loses, and how fast it is growing or shrinking. But sometimes … it isn’t.

In the case of Truth Social, its revenue during the first nine months of last year was just $3.3m from advertising, and it recorded a loss of $49m.

Why don’t investors care about the fundamentals?

Historically, the big reason why stock valuations become detached from reality is speculative bubbles. Even if you don’t think a company is particularly valuable, it may still be worth buying their stock at a high price if you think you can sell it on at an even higher price.

But Truth Social seems to be part of a more recent phenomenon: the “meme stock”.

What is a meme stock?

The term was coined to describe a small group of publicly traded stocks that have attracted a big proportion of private “retail” investors. Those investors typically use zero-commission trading apps such as Robinhood to take a much more active role in the markets than has been typical for individuals until recently, and coordinate on social media, particularly sites such as Reddit, to share stock tips.

Infamously, the valuation of the American video game retailer GameStop rose by more than 1,800%, after a critical mass of investors coordinated on the WallStreetBets subreddit to take a stake. The investors’ theory was that an engineered “short squeeze” could force those who had “shorted” GameStop – that is, bet on its share price falling – to buy the shares back at inflated valuations. Three years on, GameStop remains almost 10 times more valuable than it was just before it achieved meme stock status – and just a quarter off its peak.

Is Truth Social a true meme stock?

Investors in Donald Trump’s social network definitely have a lot in common with those in the GameStop bubble. Coordinating online to boost a share’s value with lots of little investments from individuals, rather than big corporate investors, is a similar story to GameStop and other meme stocks such as the cinema chain AMC or the rental company Hertz.

But unlike those shareholders, there is little sense that the Truth Social investors are driven by, or even care about, turning a profit on their stake. Instead, buying in is seen as a chance to invest in Trump – or even just to show your support for the man. In that way, Truth Social has less in common with other meme stocks and more with non-fungible tokens (NFTs) and cryptocurrencies – a market the former president has also dabbled in.

Can Trump sell out early?

With legal bills in the millions – including one reduced this week from $454m to a still hefty $175m – the big question for many is whether the Truth Social float will allow Trump to turn his newfound paper wealth into hard cash. Officially, the answer is a simple “no”: the IPO agreement requires insiders to hold their stake for six months after the company goes public.

But that can be overruled by a vote from the company’s board of directors, which includes such independent votes as Donald Trump Jr, and Linda McMahon and Robert Lighthizer, two former officials in Trump’s administration. Even if they choose not to authorise a sale, they may offer a halfway house, rewriting the agreement so that Trump Sr can use his shares as collateral for a loan.

Will Truth Social ever make money?

A few years ago, it was possible to foresee a rosy future for Truth Social. The increasing polarisation of American society meant the conditions were ripe for a rightwing social network, in contrast to the Silicon Valley ideology that dominated online. Truth Social, with its backing from Trump, felt like the most likely to succeed in that space, against the 4chan-inflected tone of its precursor Gab and the Trump-allied site Parler.

Then Elon Musk bought Twitter. Under the billionaire’s ownership, the site, rebranded as X, has become the home of the online right on its own, shedding a fifth of its users in the process. There’s plenty of criticisms one can lay at the feet of Musk, but being censorious of rightwing viewpoints isn’t one: one of his first acts upon taking control was to rescind Trump’s ban from the platform – all for nothing, since the former president continued to post on Truth Social instead.