Facebook Friends and Stock Market Trends

In recent months, with Facebook’s public value under scrutiny, investors have dug a little deeper to see how its infrastructure could produce results.  The social media giant’s milestone of one billion users didn’t seem to impress investors, as the company’s stock dropped a point that day.  And even sheer volume of connections on Facebook doesn’t seem to say much, according to one study, as evidenced by Research In Motion’s numbers.  Blackberry’s Facebook page has over 12,000,000 “Likes,” yet its stock has decreased by 39% over the past year.

Instead, the study points to “brand advocates,” or as we often call them, “content creators.” These overly-active users frequently recommend brands to others and bring companies to the social media forefront, as opposed to most users, who will “Like” a page once and never interact with it again.  The research found that “brand advocates create twice as much brand content, are 70% more likely to seen as a good source of information by others and are 50% more likely to influence a purchase decision.”

But the key, according to one analyst, is not connections, but the change in connections that counts.  Arthur J. O’Connor, a long-time risk manager and current business Ph.D. student, wrote a paper that directly connects fan-counts and share price.  “It’s like high school,” he said. “Does being really popular help you win friends [or] help you enhance your performance? And it turns out that, yeah, popularity does seem to help brands.”

O’Connor took 30 of Facebook’s most popular brands and tracked their market performance for over a year.  And when comparing their results to their Facebook popularity, he found that 99.95 percent of the change in stock price correlated in some way with how much attention the company received on Facebook.  He doesn’t say, for sure, that Facebook popularity precedes market success, but more so that the two go hand-in-hand.

To me, this chicken-and-egg scenario tells us more about the importance of a strong, positive presence on Facebook rather than the possibility of a crystal ball for Wall Street.

But the research is just beginning, and at least one new analysis is out to prove me wrong.  The “Wired Social Index” collects data from 9 of Facebook’s “most-liked” companies, including Coca-Cola, McDonalds, and Starbucks, and wants to show “whether the Facebook platform is helping to create and enhance top brands or whether it is simply a showcase for them after they have already become successful.”  If it’s the latter, Facebook and Wall Street may be in for a rocky relationship.

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8 thoughts on “Facebook Friends and Stock Market Trends

  1. I’ve never been a “fan” of liking different companies’ Facebook pages. I don’t like having advertisements and promotions pushed to my news feed more than they already are, maybe because I use Facebook almost exclusively to stay connected with friends, not interact with brands. I tend to agree with the idea that success precedes Facebook popularity, but you’ve raised a lot of good points! Nice post!

  2. First off, great blog post. Very relevant topic as Facebook’s second lockout ended, causing the stock price to drop even further.
    Even though Mr. O’Connor has nice conclusions they are based purely on consumer brands, which have a retail business model. Luckily for him, those who “like” A&F, American Eagle, or Best Buy on Facebook are the same people who have the buying power to spend money at those stores. In a perfect world it makes sense that the sales would then increase to drive revenue and ultimately the stock price.
    Unfortunately this nice analysis does not always hold true. It is a very simplistic view considering that stock prices take so many other factors into consideration. Meanwhile, the study from Wired is exactly what I would expect- no correlation. Considering that most of the companies from the Wired study are also consumer brands, it is tricky to draw draw any conclusions. Even if there is correlation between “likes” and stock price as Mr. O’Connor claims, I would think twice before attributing any causation.
    Ultimately it is still difficult for companies to measure the ROI on Facebook “likes.” Stock prices are driven by creating Value and social media has a long way to go before making waves on Wall Street.

    • Thanks! I completely agree, the data is far too thin right now, and obviously this may be just one factor that determines the success of a stock, but Facebook as a company would be legitimized just a little bit more if it proved to be an indicator of another company’s successes or failures. I’m interested to see if there proves to be any correlation at all (maybe not likes, but activity in general), and if so, whether companies more aggressively pursue Facebook fandom.

  3. I can’t wait to see what comes of this research! I think one factor in this correlation is that brands that know how to engage customers on Facebook also know how to market their products well outside of social media, leading to an increase in stock price. While I don’t always enjoy ‘liking’ brands on Facebook, I can always be persuaded to with a good campaign that requires my engagement. It seems as though when a company learns how to do this correctly, they can excel in other areas.

  4. Really interesting blog. I think until further research is done its hard to say much about this subject. I think there might be some mix going on, brands which are popular usually will get a lot of likes. I think that I agree more with the showcasing theory. I think social media is more about retaining, managing and engaging customers rather than setting yourself up as a brand just through social media. Social media could be one of the tools.

  5. Great post, Ryan! I think it’s important to point out Breanna’s comment: “I think one factor in this correlation is that brands that know how to engage customers on Facebook also know how to market their products well outside of social media, leading to an increase in stock price.” I couldn’t agree with her more! I think marketing and the success of many companies comes down to how good they are at encouraging consumers to interact with their brand and then influence others to also interact with their brand. That being said, I think Apple is a company that does this really well, yet the firm recently experienced a huge drop in its stock price. Really interesting topic – thanks for sharing!

  6. Great post Ryan. I think its really interesting how much Social Media coordinates with the offline world I thought your post tied the two together very well. What I wonder is how much this could be used in the future by analysts to predict stock prices. Years from now will analysts see social media trend graphs next to their terminals and react on a financial front to what people are saying in the internet space. Overall I think it’s very interesting to see where this goes and part of me wonders (like you mentioned) about the chicken vs. egg dilemma. Which is really affecting the other? If I had to guess I would say that Social is indicative of general business trends and thus affecting stock price but I would love to read some more in depth research about the topic. Great post!

  7. Love this post and great research! A interesting trend that is very relevant and a great example of how social media can affect our markets. In fact, this post makes me think of Dan’s post this week on Facebook being a high school reunion in a way. It’s important nowadays that companies ARE popular on Facebook and that their social media strategies/image are favorable by the public. I watched an episode of America’s Top Model a while back, and was intrigued to see that how well a candidate does depends partially on their social media “scores.”

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