• Digital World Acquisition (DWAC), the SPAC taking Truth Social public, is holding steady.
• Uncertainty over Elon Musk going through with his Twitter (TWTR) takeover is the likely reason.
• Twitter deal or no Twitter deal, there’s still big downside risk with DWAC stock.

Speculative stocks have been hit hard in recent days, but not Digital World Acquisition (NASDAQ:DWAC). While plunging in March and April, DWAC stock has held up relatively well lately.

As you likely know, this is the special purpose acquisition company (SPAC) taking former President Donald Trump’s social media startup public. Last month, when Twitter (NYSE:TWTR) accepted Elon Musk’s takeover bid, concerns escalated that Musk, vowing to make Twitter free speech-friendly, would make Truth Social irrelevant.

Yet, with Musk putting his Twitter deal “on hold,” worries about Truth Social’s future have eased. As seen from the widening merger arbitrage spread with Twitter, there’s now a high degree of skepticism that the transaction will be completed.

Still, I wouldn’t view this as a bullish signal for Digital World shares. Even if Twitter stays out of Musk’s hands, don’t expect it to be something that prevents DWAC stock from a further drop in price.

DWAC Stock and the Musk/Twitter Drama

This month, the main driver of DWAC stock has been the latest news regarding the Musk Twitter takeover. The prospect of a Musk-run Twitter is seen as a major threat to Truth Social, and by extension the Digital World SPAC, which will take on the Trump Media & Technology Group name when the SPAC merger completes.

If Musk takes over Twitter, the thinking goes, the platform will become more hospitable to political conservatives. This perception could limit how many users make the switch over to Truth Social. With this, DWAC stock sank when Twitter shareholders accepted Musk’s $54.20 offer.

But since Musk said the deal was “on hold” amid a push for more details on the number of fake/spam accounts on Twitter, this headline-making deal no longer appears to be a sure thing. One sell-side analyst, Wedbush’s Dan Ives, says the deal has a less than 50% chance of getting done.

If Musk doesn’t buy Twitter, the perception that Twitter is unfriendly to political conservatives will remain. This, in turn, improves Truth Social’s chances of becoming a major platform. But this may not be a catalyst for DWAC stock, as it does little to resolve other issues.

Why Musk-Free Twitter Isn’t a Needle Mover

There’s no denying that the Twitter deal falling through would be a positive for Truth Social. The platform is built on the belief that big tech is biased to the political left, leaving an untapped market for a conservative-friendly, nominally “neutral” social media site.

Whether a scrapped Twitter deal is a game-changer for DWAC stock is another question. It’s not something that’s going to help sustain this blank-check company’s implied valuation, much less grow it over time.

Based on the pro-forma share count provided in Digital World’s S-4 filing, there will be around 126.9 million shares outstanding post-merger. This gives it an implied valuation of $5.6 billion. However, this share count will increase. The extent of the increase depends on the conversion price for the $1 billion in PIPE funding it’s also raising.

Furthermore, as evidenced by its investor presentation, Digital World/TMTG doesn’t see Truth Social becoming a multi-billion dollar business in its financial projections. Instead, the bulk of its future projected revenue is expected to come from its planned TMTG+ video streaming service.

Risk/Return Still Not in Your Favor With DWAC Stock

The latest drama surrounding Musk and Twitter fails to bolster the bull case for Digital World. As changing market conditions lessen the appeal of speculative growth stocks, this SPAC’s valuation will likely keep falling.

Today’s valuation is not sustainable — $5.6 billion is too high for a pre-revenue company — especially given that its future primary revenue driver (TMTG+) is only starting to get off the ground. Worse yet, the more DWAC stock falls before the deal closes, the greater the PIPE dilution.

If shares are trading for under $56 per share at the time of the deal’s close, PIPE investors can convert at a 40% discount to its volume-weighted average closing price (VWAP), with a floor price of $10 per share. Greater dilution will limit upside potential, as it will cut the pie into many more slices.

Put simply, avoiding DWAC stock is still your best move.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.