INSIGHT. 03/15/18

Social Media and its emerging role on Wall Street

By Tom Ryan Co-Founder & CEO of ICR

Having spent more than a decade on Wall Street as a sell-side analyst, and the last 20 years as the CEO of a strategic communications firm that provides advice to more than 500 public company clients, I have watched the rise of social media and often viewed its role and importance in the area of Investor Relations with some skepticism. While some companies use social media to communicate financial news, the fact remains that most investors and analysts prefer receiving company updates through more traditional means – like press releases, earnings calls, one-on-one meetings, investor days and conferences.

But investor preferences are changing and social media’s impact in the investment community is on the rise.

This momentum comes in the form of sell and buyside analysts increasingly using social media sentiment as an important data point in developing their investment thesis. In an age where technology and analytics are front and center, this seems logical and creates an interesting contrast to many traditional Wall Street research practices. For example, a consumer analyst that focuses on footwear, apparel, retail, casinos or restaurants would traditionally visit stores, talk to buyers, customers and cashiers and try and piece together trends. While this is certainly research, it’s not broad based or grounded in data. It’s merely a small sample size of qualitative observations. The analyst would then combine their findings with management’s forward guidance, tweak their financial model and develop a point of view on valuation. This process has endured for years; and still does to a degree. But change is coming.

Look no further than a recent research report from Evercore ISI whose Consumer Softlines/Department Stores & Luxury Group published “Social Media Tracker Inaugural Edition”. Explaining their new direction Evercore stated:

This report marks the debut of our Social Media Tracker, a monitor of consumers’ digital engagement with ~80 different Softline brands & retailers.

In a nutshell, we believe platforms such as Instagram are evolving into the ultimate venue for consumers to discover (and buy) products, brands, and trends. And because of its fast-moving viral network effect, an inflection in consumer engagement with a brand on social media often precedes the revenue acceleration that flows through the P&L. And we think the channel will only become more important as it continues to evolve from more of a pure marketing arena into a platform with comprehensive B-to-C discovery, engagement, customization, purchase, and consumption capabilities. However, despite its seemingly endless potential as a channel for discretionary consumption, please also consider its limitations as an investment tool when going through the more detailed findings in this report (and future editions). Social media is still a relatively new phenomena, and there can be significant volatility in social media data because it can be easily skewed by influencers, collaborations, one-off contests/promos, etc. Ultimately, we find the developments unfolding in this new channel of consumer discovery informative and well worth tracking for the purposes of our investment process.

Cowen & Co. has also leaned on social media metrics. Note the paragraph below from Cowen’s Andrew Charles in his October 6, 2017 report on fast casual restaurant chain, Chipotle Inc. (CMG):

“We track daily Facebook check-in’s at CMG to help analyze the impact of Queso’s 9/12 national launch (new product launch). If check-in’s are indicative of traffic, data suggests the traffic lift topped out at the end of Week 1, with modest deterioration in Week 2, and decelerated faster in Week 3. We reiterate our 0% 3Q comp estimate vs consensus of 2.5%.” 

And his concluding summary:

“Additionally, we compare the raw number of check-in’s so far in 4Q17 to the same time period in 4Q16. We can see a 25%+ deterioration in the level of y/y trend which prompts further caution (for investors).”

While we’ve referenced two sell-side firms using social media insights as part of their research, there are others, and we expect more will follow. So given this trend, what are the implications for Corporate America?

Let’s start by agreeing that social media posts and content, and most if not all corporate communications, are seen by all stakeholders including the media, shareholders and analysts.

Maybe this is best exemplified by social media influencer Kylie Jenner’s tweet on February 21, 2018, “sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad”.  Snapchat immediately lost $1.3 billion in market value.

Given how quickly Snap’s shares were dumped, we would think all C-Suites, including IROs would be actively monitoring social media.

Alternatively, marketers need a broader perspective which includes understanding how marketing a product and marketing the corporate brand are increasingly intertwined. It requires a comprehensive social media strategy that includes both customer outreach and highlights the corporate brand, while remaining acutely aware of how the message could be interpreted by the enterprise’s many constituents.

Combining those two approaches, a company’s social/digital strategy must be broadly accepted and integrated across the entire communications and marketing platform. This is just common sense if the equity value of the company is even partially linked to online sentiment.

In our view, this doesn’t necessarily mean companies have to run out and tweet their earnings performance because institutional investors still seem to want their news in traditional forms.  But would putting highlights from an earnings release on Facebook or Linked In draw broader attention? Or would tweeting corporate highlights help online sentiment? We believe so, if done in a responsible and non-promotional manner. After all, social media is already being measured, monitored and integrated into valuation. Why not participate?

More generally, it’s clear that the traditional IR function and approach must expand as Wall Street research expands and evolves. It must be far more conversant and plugged into the Digital/Social/Marketing strategy and how that strategy affects the corporate brand and reputation and ultimately valuation.

In our view, this trend will only accelerate as the next iteration of investment due diligence includes even bigger data sets like commercial transactions, satellite imagery, blogs, media, product reviews and other personal data. As NHL Hall of Famer Wayne Gretsky famously said, “skate to where the puck will be” versus “where it is right now”. Investors and analysts are already moving forward and Corporate America must also evolve and quickly align their internal teams with these trends.


 

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