If you think you know everything, you could end up with nothing.
Trump Media & Technology Group (DJT 0.48%), often shortened to Trump Media, isn't a typical social media company. It's directly tied to former U.S. president and current presidential candidate Donald Trump, which is no small matter during an election year.
Trump Media stock has been choppy this year and can't seem to pick a direction. That might be fine for short-term traders, but long-term investors might get frustrated and bail if the stock remains directionless for much longer.
Yet, it's not necessary to sell Trump Media stock out of frustration if you manage your position size and own it for the right reasons. Problems can occur when investors make assumptions about future outcomes, which can only be guessed and never known.
It's not just about Nov. 5
First and foremost, Trump Media is the parent company of right-leaning social media platform Truth Social. Election results might boost or sink Trump Media stock, but a sustained share-price rally will be awfully difficult if Truth Social doesn't gain traction.
Granted, Trump Media and Truth Social have a decent-sized capital runway, so Truth Social has some time to develop. Trump Media had cash and cash equivalents totaling $273.7 million at the end of March, and the company could generate as much as approximately $247 million in proceeds from the exercise of warrants. In any case, Trump Media "believes it has sufficient working capital to fund operations for the foreseeable future," though "foreseeable future" could mean just about anything.
In addition, Trump Media announced its plan to issue up to 5.1 million common stock shares, which certainly raises share-value dilution concerns. So, before you overload your portfolio with Trump Media stock as a wager on a Trump election victory, consider the possibility that Trump Media might print and sell more shares at some point. Hopefully, this capital-raising strategy won't become a habit for the company.
Also, note that Trump Media won't just be an X/Twitter rival. Trump Media intends to jump headfirst into TV streaming. Whether this digital media foray helps Trump Media achieve its objective of ending "Big Tech's stranglehold on digital communication," to quote CEO Devin Nunes, remains to be seen.
The hazards of calling elections
With President Joe Biden dropping out of the 2024 election and the Democratic Party having to make 11th-hour adjustments, some oddsmakers might assume that Trump will easily win in November. In a similar vein, investors may load up on Trump Media stock in anticipation of an assured Trump victory.
However, recent history shows that an election isn't over until the final vote is counted. After all, it was around this time in the 2016 election cycle that many oddsmakers believed Hillary Clinton would beat Trump with a comfortable margin -- and we all know how that turned out.
Now, the risk-reward balance is skewed in the other direction. If the oddsmakers assume a Trump win, then the efficient financial market will likely have already priced this belief into Trump Media stock. And if the election doesn't turn out as expected, Trump Media's investors may be in for an unpleasant surprise.
For what it's worth, recent developments suggest that the odds of Vice President Kamala Harris' election are increasing, and the probability gap is therefore narrowing. By the time you read this, the tide of sentiment could have turned in either direction multiple times. As Tastylive founder and CEO Tom Sosnoff put it, "This thing is going to go back and forth," and investors jumping on the "Trump trade" bandwagon are "making a huge mistake."
This isn't to suggest that owning any Trump Media shares at all is a "huge mistake." If you expect Truth Social to gain users and succeed in the TV streaming arena, it's not unreasonable to hold a small, speculative position in Trump Media stock.
It becomes problematic, however, when premature election calling leads to a hasty or oversized trade -- be it buying or selling -- in Trump Media stock. Thus, as long as you're willing to remain outcome-agnostic and separate your politics from your profits, you may be a good candidate to hold Trump Media for the long term.
David Moadel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
