Getty Images; Alyssa Powell/BI
Wall Street tends to downplay or miss social media's impact on companies. But these days, omitting it could mean missing out on critical information.
Round one of missing out happened in 2021, when the WallStreetBets movement caught some short-selling hedge funds off guard.
Round two involves viral backlashes against companies.
You can partly thank TikTok for it. The video-sharing giant, founded in 2016, has grown to 121 million American users spending an average of an hour daily. It's become the go-to app for sharing first-person experiences, opinions, and calls to action, including political ones.
The fallout from a viral trend can sometimes go as far as impacting a company's bottom line. Last April, Bud Light's partnership with the transgender influencer Dylan Mulvaney angered right-wing conservatives and anti-LGBTQ groups who called for a boycott across X and TikTok. By mid-April, its sales were down by 17%. Its parent company's stock, Anheuser-Busch (BUD) followed suit, falling 20% by October, likely due to investor fears.
Competitive hedge funds have long used alternative data like social media listening tools that track X hashtags, said Kirk McKeown, who spent much of his career building proprietary research platforms for the buy side, including at top fund Point72. But the rapid virality of brand sentiment on a platform like TikTok, where people engage around values, is a relatively new phenomenon, he said. Wall Street investors and analysts may find themselves behind the curve if they don't pay adequate attention to viral platforms like TikTok.
Social media's impact on brand sentiment has grown rapidly since 2020. A March survey of over 10,000 US internet users by the Pew Research Center found that while political content was more prevalent on X, about 73% of users who post political content on TikTok perceived it as a platform where they can make a difference.
Self-directed investor Chris Camillo, has long been aware of social media's influence on stocks and has used it to trade for almost two decades. In 2015, he created TickerTags, a social media data aggregator that tracks company mentions, and sold it to Jefferies' M Science. He spends an average of three hours a day scrolling through platforms like TikTok, looking for shifting consumer sentiment he could trade on, a method he calls social arbitrage. His source of alpha has been catching trends before Wall Street does, usually an earnings season early.
In April 2023, Camillo picked up on the Bud Light controversy and purchased short-term call options of its competitor, Molson (TAP), betting on its share price going up. According to records of his brokerage statement, he pulled in multi-six-figure gains. Over a 15-year period through 2021, he turned in over $42 million in gains using this method.
"Our strategy as social arbitrage traders really revolves around the fact that the one thing that is not often reflected in a stock's price are recent changes in culture or consumer behavior, or how the customer base for a particular company happens to be changing due to what could be a single piece of information or a single event like a boycott," Camillo said.
Camillo is referring to Starbucks. The coffee giant's stock is down almost 30% from its November peak when it reported impressive fourth-quarter earnings with an 8% rise in same-store sales.
Things were looking up. But by early October, boycott calls began to spread like wildfire across TikTok after Starbucks became embattled with its union. The workers posted a short statement in solidarity with Palestine on X. The coffee giant then sued over trademark infringement and claimed reputational damage. But it might have further tarnished its image in the process: TikTok users who had been inundated with videos of injured civilians from Gaza quickly found an outlet for their frustration, sympathizing with the union.
There's no way to know for certain why markets react the way they do, but it's possible that savvy investors picked up on something going awry before it showed up in earnings.
Starbucks' fourth-quarter earnings, released on November 2, didn't hold up, and the stock plunged steeply within two weeks. Short interest in SBUX also increased around the same period and continued rising until it reached its highest in over five years, according to MarketBeat. Data from S3 shows that since late October, it was up by about 136% at its peak in July and remains elevated.
"Given that the company had reported such strong results in November, the fact the stock was so weak so quickly after that would suggest that some investors have decided that this boycott will impact their financials," said Paul Johnson, a managing director at Nicusa Investment Advisors and adjunct professor of business at Columbia Business School.
Six months later, Starbucks released its second-quarter earnings, and the boycott's impact was clear. On the earnings call, CEO Laxman Narasimhan acknowledged that "misperception did have an impact on our business," adding that the company had invested in strengthening its brand perception. A mention of the boycott appeared in a May 6 Bank of America note, which stated that social media coverage was the likeliest cause of the sales drop.
"When they reported, it was clear that something very sudden had happened," BofA analyst Sara Senatore told Business Insider, adding, "I've never seen same-store sales declines of the magnitude that we saw between, let's say, October and November of last year, without an acute catalyst for that."
She said that possible explanations, such as value proposition or slow service speeds, just wouldn't create such suddenness. However, Senatore had previously downplayed the boycott's effect as late as December, suggesting that foot traffic declines didn't line up with the boycotts.
The chart below demonstrates the stock's volatility despite positive earnings through the final quarter of 2023, followed by a sudden plunge after the fiscal second-quarter earnings release on April 30.
Markets Insider.
Not all viral movements are political. Chipotle (CMG) has been under scrutiny from customers on TikTok who complain about shrinking portions. The movement was sparked by Keith Lee, a TikTok food blogger with 16.5 million followers, who posted a video on May 3 complaining about the chain's declining quantity and quality. Agreeing customers began filming their orders to pressure employees into increasing the scoops and walking out in protest if they didn't.
If you were scrolling through TikTok in May, chances are you saw videos of people jokingly using camera crews, lighting, pods, and dollies to film. It was so widespread that by May 30, Chipotle CEO Brian Niccol appeared in a TikTok video, flustered as he assured customers that there had been no shrinkflation. It amassed over 15 million views. A day later, a comedy creator hit back with a parody video mimicking Niccol, amassing over 22 million views, more eyeballs than a show on primetime TV.
Chipotle shareholders reading analyst reports probably didn't get this briefing. A June 13 note from Goldman Sachs stated that in a survey of 2,000 consumers, Chipotle "undoubtedly" stood out as the winner in relative quality versus relative value among fast-casual and fast-food chains. The almost 100-page note didn't mention the brand's social media turmoil.
Two weeks later, a follow-up note addressed investors' concerns over negative TikTok sentiment. It cited data showing that Chipotle's shrinkage was in line with its fast-casual peers, and that foot traffic was recently improving. However, it didn't mention that those peers did not trend for it.
"I think it's one of those things where those analysts aren't going to be around in the long term. They're not taking it seriously," said Matt Ober, a former data strategist for hedge funds.
He continued, "On the buy-side, sell-side research is great, but you're not paid to just do what the sell-side tells you. You're paid to do the harder work and decide which sell-side analysts are worth following, which ones can give you insights to do your job better. So if I'm a consumer investor and they're not even paying attention to the broader sentiment happening from the retail side, then I'd be concerned about following that person."
Speculating and making decisions based on social media trends is a risky wager. If you end up wrong, it's worse than if you had followed other data and still ended up wrong.
Wall Street doesn't always respond to social media trends that could negatively drive fundamentals because there aren't tools to understand the impacts, McKeown noted. Sell-side analysts evaluate companies based on earnings. This means using data that has historically correlated with a company's direct business operations. In the event a social media trend is mentioned, it's not factored into their valuation model, Ober added.
But being late, remaining unaware, or misjudging a trend could add tremendous risk to an investor's exposure, said Camillo. So, if you're not using that data to gain some type of edge, you should be using it as a form of risk management, he noted.
Deciphering through social media noise can be tricky. Camillo uses his judgment to determine how serious a trend is: a portion size issue isn't the same as something that's touching politics, which people can get extremely emotional about, like the Starbucks boycott, he noted.
How social media sentiment plays into a thesis should depend on an investor's time horizon. The question becomes, what's the durational impact an event will have on a company, McKeown noted. Longer-term Starbucks shareholders who believe in the brand, may see this as a buying opportunity and assume it will figure out its relationship with its union, he added.
However, McKeown admits that Wall Street may be perceiving some of these trends as episodic events when in reality, they could illustrate the beginning of a broader theme and a demographic shift about what different generations value — one that may be here to stay.
