As Rumble, Trump Media (DJT) stocks surge, brace for a pullback

Rumble (RUM) and Trump Media & Technology (DJT) stocks went vertical this week as the election cycle took more turns recently.

Rumble, a popular YouTube alternative, soared by over 20% after the Trump shooting and after he nominated JD Vance as his vice president pick. Vance, together with his friend Peter Thiel, have invested in Rumble.

RUM vs DJT stocks

Trump shooting and odds of winning

The RUM and DJT stocks bounced back as investors and analysts predicted that Donald Trump would win the upcoming general election. These odds jumped after Trump was shot by an assassin at a rally in Pennsylvania.

Before that, Trump was doing well after Joe Biden’s performance at the first debate two weeks ago. As a result, the betting market believes that Trump has a real chance of winning if he is paired with Joe Biden at the election.

A key game changer will be if Biden decides to drop out, a move that will pair Trump with a younger candidate. Some of the most notable names are the likes of Kamala Harris, Gretchen Whitmer, and Gavin Newsom.

Therefore, DJT and RUM stocks rose because investors anticipate that the election season will have more twists and turns, which will lead to more engagement.

A Trump victory could also boost activity in Truth Social, a niche social media platform that competes with the likes of X and Gab.

RUM and DJT stocks face major risks

Still, these companies face substantial risks ahead. First, they both rely on advertising and are facing challenges as most mainstream advertisers avoid them.

In the past few years, many mainstream advertisers like Amazon, AT&T, Verizon, Procter & Gamble, and Walmart have avoided right-wing platforms, including Fox News. Therefore, it is unclear whether smaller companies will help to offset bigger firms.

Second, the two companies are incinerating cash and will likely lead to more dilution in the coming years. The most recent results showed that Rumble’s net loss stood at over $43.3 million in the first quarter, a big increase from $28.3 million in the same period in 2023. Rumble had $183 million in cash.

Similarly, Trump Media & Technology lost over $327 million and ended the quarter with $233 million.

These numbers mean that the companies will need to raise more cash since they are spending more to build their ecosystems. DJT is building a streaming platform, an exercise that will be highly expensive. It is also unclear whether the platform will be successful as we have seen with companies like Paramount and Warner Bros.

Rumble is also spending heavily on content and technology and is unlikely to make a profit soon.

Therefore, there is a significant risk that DJT and Rumble will raise hundreds of millions of dollars in the next 12 months.

Competition and valuation concerns

Most importantly, competition in the social media industry is stiff. Rumble faces strong competition from YouTube, a behemoth that has billions of users globally. It had over 95.6 billion visits in the second quarter compared to Rumble’s 351.8 million.

YouTube has built a moat by paying its creators substantial sums of money. As such, it will be hard for Rumble to attract mainstream creators over time. Its cloud solutions face significant competition from the likes of Google Cloud, AWS, and Azure.

Trump Media, on the other hand, is facing elevated competition from platforms like X and Reddit.

All these factors have led to valuation concerns since DJT has a market cap of over $7.7 billion against Reddit’s $10 billion and X’s $19 billion.

Therefore, I believe that the recent surge of DJT and RUM stocks will be short-lived as we have seen before.

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