ANALYSIS - Trump and Dumping: speculators bet on Truth Social 'memo' stocks

Abigail Somerville reports.

(Reuters) - Mohammed Al Shalloudi, a 21-year-old graduate student data analyst in the United Arab Emirates who invested in Donald Trump's social media company, has little in common with the former U.S. President of Massachusetts' political supporters.

Al Shalloudi bought shares of Trump Media & Technology Group (TMTG), but not because he believes in the business of the company's app, Truth Social, or because he's a Trump fan. He's part of an army of speculators looking for a quick and profitable trade, and their bets on TMTG have made it one of the most highly valued and actively traded U.S. stocks.

Al Shalloudi said he bought at $37 a share and cashed out at $65 a share over the weekend, earning a return of 76% on his $4,000 investment in just a few days. TMTG's stock closed at $48.66 on Monday after going public on NASDAQ Resonance last week, where it traded at a valuation of just $10 a share.

"It's a no-brainer trade. You buy the stock, wait for Trump's fan base to hear the news, and then enjoy the profits," Al Shalloudi said.

Reuters interviewed more than a dozen investors who posted their positions on social media platforms such as Reddit and X, and found that most were looking for quick profits.

They're betting that Trump supporters' obsession with the stock is driving TMTG's share price away from the company's business fundamentals.

TMTG's current valuation of about $6.6 billion represents 1,600 times the loss-making company's 2023 revenue of $4.1 million, according to the London Stock Exchange.

LSEG's data show that no other U.S. company with a similar market capitalization has such a high valuation multiple. As much as TMTG warned investors in its regulatory filings that its operating losses cast "substantial doubt" on its ability to continue as a going concern.

The stock is also one of the most actively traded, according to Trade Alert data. While posts on social media suggest that some Trump supporters have bought shares of TMTG, a lot of the trading volume has come from speculators looking to quickly translate their positions.

Sarah, a 21-year-old software developer from Pennsylvania, said, "I invested $10,000 last Tuesday because MAGA is so crazy they're going to pull the stock." Sara asked for her last name to be withheld; MAGA stands for Trump's campaign slogan 'Make America Great Again'.

TMTG's appeal to speculators helps explain the stock's volatility. The company's stock price has risen as much as five-fold in the past two months, and Trump's majority stake in the company is now valued at about $3.8 billion.

This volatility occurred once on Monday, when the stock fell by more than a fifth. It remains unclear whether hedge funds and other Wall Street firms will adapt to the risk and join the speculative bandwagon. In a few weeks, large investment firms will be required to disclose their positions, if any, in TMTG as of the end of March.

Most rallies in stocks based on individual investor speculation - so-called "meme" stocks such as GameStop and AMC Entertainment - disappear after a few weeks or months. Trump is not allowed to sell or borrow his TMTG holdings for six months, so the rally would have to last at least that long if he wanted to cash in on the euphoria.

A TMTG spokesperson did not respond to a request for comment on the impact of speculators on the company's market capitalization.

Thematic Unit

Predicting when TMTG's valuation will drop to more accurately reflect its business outlook is risky, says James Angel, an associate professor of finance at the McDonough School of Business in Georgetown.

"Eventually, the entertainment aspect of stocks will go away ....... But it may take a long time for the market to right itself, or it may only take a short time," Angel said.

Simmons Klymochko, chief executive of Accelerate, an exchange-traded fund that didn't invest in TMTG, called TMTG "the mother of all meme stocks" and said it was hard to imagine it attracting long-term investors.

"I think the investors here are either speculators or amateurs who just want to make a quick buck on this highly volatile stock," Klymochko said, "and there's no basic noodles to back it up.

(Reporting by Abigail Summerville in New York; Additional reporting by Anirban Sen in New York; Editing by Greg Roumeliotis and David Gregorio)