Social media firms are perhaps not as trendy as they once were, with AI taking their place as the sexiest buzzword in town, but nonetheless, the incredible network effects firms like Facebook have been able to monetize ensure that they retain their allure in the yes of investors, if no one else.
A recent study from Michigan Technological University explores this phenomenon to understand why social media stocks remain so popular.
“There are so many things that swirl around social media firms that make them inherently interesting to research,” the authors say. “These are publicly traded firms, but also private entities. They decide their own corporate strategy and users decide whether their social platform is attractive.”
User generated success
Part of the problem is that social media is itself a very broad term, encompassing not only social networks like Facebook and Twitter, but also social gaming sites and other platforms that consist primarily of user-generated content.
“I think it’s really a function of the way technology has disrupted things–that we have a hard time classifying and understanding this. I don’t think our classification will catch up, especially as we sit on the cusp of the Fourth Industrial Revolution,” the researchers say.
This in turn makes it hard to price a social media company as the underlying fundamentals can be so unique, but that doesn’t appear to stop investors from trying to lump them all together.
“Social networking spaces are believed to have a higher degree of self-representation than social gaming spaces. For example, posting in a Facebook news feed offers highly personalized information about the author (and possibly the friends who the author chooses to include in the post), whereas participating in multi-player online gaming has less flexibility for specific personalization. Your picture sends different information than does your avatar,” they write.
Pricing social media
The first step to create an accurate price for a social media firm is to understand. The researchers attempted to understand how retail investors do this, as they often lack the amount of financial data that professional investors can rely upon.
“If I’m searching for a firm’s ticker–the three-digit or four-digit code that uniquely identifies the entity–then I’m obviously looking at that firm from a financial perspective, perhaps considering the stock for inclusion in my portfolio,” the researchers explain.“We can place our finger on the pulse of what investors are paying attention to–and they pay attention to social media stocks over other stocks.”
The volume of searches tends to rise and fall depending on the volume of attention investors pay to specific companies. Suffice to say, it is only one signal in relation to explaining price fluctuations, but it does nonetheless provide a direct indication of interest in a firm. It may, therefore, be worth keeping tabs on search volume if you’re interested in understanding the value of social platforms.
