Tremendous Upside Potential
Prompted on X nee Twitter to share an insult he’d never forget, our founder and CEO Brent told of the time (and he wasn’t making this up) a Deputy CIO at an Ivy League endowment told us they weren’t interested in investing with Permanent Equity because they were “only interested in opportunities with upside.” Having, at that time, recently moved my family to mid-Missouri to take a job at Permanent Equity precisely because I was interested in upside, the comment caught me a little flat-footed.
I think this Deputy CIO’s perspective was that because Permanent Equity invests in companies that do rudimentary things like build fences and then does uncreative things with the profits from those enterprises like distributing them to owners (hello, beer money), our returns were necessarily constrained. And while our approach was and is pretty exciting to me, I guess that is another way of looking at it.
But I was thinking about this whole idea of upside the other day as I watched the machinations in the stock of the newly public Trump Media & Technology Group (Nasdaq: DJT). What a curious situation that is…
In case you haven’t looked under the hood, this is a “business” that former (and perhaps future) President Donald J. Trump (clever ticker!) conceived of to compete with Twitter now X because they kept kicking him off the platform due to things he said that others thought he shouldn’t. But I put “business” in quotes because it’s not much of a business at all. Based on what was filed with the SEC (and let’s go out on a limb and say we can trust that), Trump Media & Technology Group lost $58M last year (though some of that was not beer money) on revenue of just $4M. Further, this “business” believes that “adhering to traditional key performance indicators, such as signups…might not align with the best interests of TMTG or its shareholders.”
Yikes!
Yet a recent market valuation of this “business” was more than $6B. To put that in context, Trump Media & Technology would be by many, many orders of magnitude the worst-performing business in the Permanent Equity portfolio, but by many, many, many, many, many orders of magnitude the most valuable. How does that work?
People are crazy is one answer, and it's not an unreasonable one. Trump Media & Technology is currently a terrible “business.” Not only is it incinerating cash, but its highly-respected audit firm issued a going concern notice (i.e., warning that the company could go bankrupt) at the same time it went public. But another answer is upside. Trump (the former maybe future President) has a lot of supporters and were they to all become loyal, paying sources of recurring revenue for Trump Media & Technology Group in some shape or fashion in the future, that terrible “business” could become a profitable one that delivers unconstrained returns.
But I dunno. $6B seems like an expensive call option on the counterfactual I just described (and people are catching onto this fact with the stock down some 50% since it was at that level).
At this point I’m reminded about the time (and this is dating me like most of my pop culture remembrances do) that ESPN blogger and now Spotify host Bill Simmons called out NBA commentator Hubie Brooks for assigning every unknown basketball prospect in the annual NBA draft with Tremendous Upside Potential. These were players who were not statistically elite, but had characteristics like height or the ability to shoot the lights out when guarded by a chair to maybe one day be. But very few ever panned out.
The point is that upside is not so different from imagination and that imagination is not so different from deception. And that’s the reason why we’re all conned so easily and/or pay up for the prospect of unconstrained returns, because believing something to be true that isn’t yet but could be is exhilarating.
In other words, Trump Media & Technology has Tremendous Upside Potential and probably more than Permanent Equity. But I’m good with Permanent Equity.
-Tim
