Add yet another metric to your watch list. A company's daily tally of Facebook fans, Twitter followers, and YouTube views could predict its stock performance, according to preliminary research.
Arthur O'Connor, a Pace University doctoral student, recently compared the popularity of three major brands — Nike, Starbucks, and Coca-Cola — on social-media Websites to their stock-price movement over a 10-month period. He found an "extremely high correlation" between the data points, using models based on statistical and regression analyses.
O'Connor says his tests show that some companies could use their fan base as a leading indicator of how their stock will perform by as much as 30 days out. The theory worked even though the companies received varied returns during the time under review; Starbucks's and Nike's stock both increased, by 29% and 14%, respectively, and Coke's declined by nearly 6%.
O'Connor sees his study as a starting point for exploring the effects social media has on a brand's strength. And he acknowledges its weaknesses. Among them: his models relied on data from Famecount.com, which aggregates data from Facebook, Twitter, and YouTube users but does not include information from private or restricted accounts. Moreover, the study looked only at companies with strong brand loyalty, none of which experienced an adverse event during O'Connor's evaluation period.
As it is, most companies lack a formal process for tracking the attention they receive on social-media Websites, says Anthony Rotolo, an assistant professor at Syracuse University who is surveying Fortune 500 companies on how they use these sites. "For now, it remains an ad hoc process of trying to be as responsive as possible," he says.
O'Connor notes in his study that some companies have been able to gauge how their products and services will do based on the flow of online chatter. For example, first-weekend ticket sales can be predicted by the rate of tweets about a movie before its release. And companies are beginning to link social-media usage to bottom-line results (see "Social-Media Frenzy," January/February). On the flip side, Gap Inc. pulled its new logo last fall after its design got slammed on several social-media Websites.
But how all that buzz affects stock performance, if at all, remains a mystery. For now, a running total of a company's online groupies is a nice-to-know metric, but you may want to hold off on incorporating it into any financial models.