Intelligence

Story Stocks Tell a Cautionary Tale

Lauren Pozmanter

Senior Account Manager

Story stocks–stocks whose value reflects favorable press coverage, rather than their assets or income–are best known to us in the form of tech giants we can’t seem to escape. Apple’s recent plunge is timely evidence of this. Once they revised their revenue targets, once they clarified the actual story, their stock plummeted, taking the market with it. The stock price fell 10 percent last Thursday, and the Dow dropped 660 points or 2.8 percent.

Coverage of Facebook, Amazon, Apple, Netflix and Google (FAANG) dominates cable, print and digital platforms, creating or reinforcing an established consensus that these organizations are exceptionally profitable. But the news cycle has created overly optimistic expectations about their potential profits, and at a closer look, valuations don’t necessarily line up with fundamentals.

There isn’t anything inherently wrong with that notion. Investors pay a premium for company shares to reap benefits of its promised growth–and in some instances, FAANG stocks and others have lived up to that hype. Let’s look at Facebook specifically.

Facebook

The ground-breaking social media platform went public in May 2012 in the largest tech IPO in history at the time. Facebook offered 421,233,615 shares at $38 per share. Just three years later, in 2015, Facebook closed at $96.95 per share. Had you initially invested $1,000 at $38 per share, you would have more than doubled the value of your investment to $2,520.70, an ROI of about 155 percent.

Value is a tricky term of course. The market reflects what people think a company is worth, not necessarily their actual value. Playing no small part in that perceived value is the “cool” factor. Disruptors like Facebook (which some analysts believe was valued too high from the get-go) have changed the way we communicate, work, and live. As disruptors, they’re innately different than established, legacy brands. So there’s no tried and true means of quantifying their real value. There is some value in that different-ness, so investors may rightly perceive disruptors’ value as inflated. However, the “hype” about a given brand is always subject to change (RIP, Pets.com); and with that, so is the stock’s value.

Facebook Stock
Facebook’s stock throughout 2018

2018 was a rough year for Facebook. On March 17, a bombshell report revealed 87 million users’ profiles were being harvested for data by conservative political consulting firm Cambridge Analytica. In the days prior to the report, Facebook’s stock closed at $185.23. In the weeks after the story played out–and following an FTC inquiry and Mark Zuckerberg’s testimony before Congress–stocks plummeted to about $151 per share.

In July, Facebook released its second-quarter results, in which it missed analysts’ estimates on important metrics like revenue and ad projections. Unsurprisingly stock values nosedived by 19 percent and wiped out roughly $120 billion of shareholder wealth.

In recent years, investors — from individual traders to the world’s largest hedge funds — have snapped up shares in these [FAANG] companies… These tech giants were viewed as having nearly unassailable revenue streams that could deliver profit growth regardless of economic conditions,” the New York Times reported. “Facebook’s stumble suggests that some of these stocks — as well as the broader market — could be particularly vulnerable if their financial results don’t live up to investor expectations.”

In the fall, Facebook announced it suffered yet another security breach that affected 50 million users, and its stock dropped once again. Then in November, another familiar narrative: Facebook’s stock fell nearly 6 percent after the company admitted to hiring a Washington-based lobbying firm to push negative stories about its critics, including George Soros–this after denying a New York Times report claiming they’d engaged in this lobbying activity.

Tesla

Facebook isn’t alone in its stocks value’s susceptibility to press coverage. Everyone’s favorite unhinged CEO, Elon Musk, took Tesla for a wild ride this year.

In May, the luxury electric vehicle company saw its shares jump as much as 6.9 percent after Musk said Tesla would not need to raise any more capital in 2018–no surprise there. One month later, when a financial analyst asked if Tesla would need to raise additional money from investors. Musk chastised the analyst for asking “boring, bonehead” questions.  Despite Tesla’s purported strong financial position, the stock lost $2 billion in market value.

Tesla stock
Tesla’s stock throughout 2018.

In early August, despite reporting its biggest-ever loss, Tesla saw a major increase in its stock value (from $292.25 to $369.05) after Musk claimed positive cash flow and profits; and surprised investors with a Twitter announcement that he was considering taking Tesla private at $420 per share. He also added that “funding [was] secured.” He created a story and drove his perceived stock value up.

But not all stories have happy endings. On August 24, when Musk reneged his comment about going private comment and said the company would remain publicly traded. Once again, stocks ultimately fell to $263 per share.

And if that weren’t enough, Tesla stocks swerved once more at the end of September after the SEC filed a lawsuit against Musk for making “false and misleading statements” about taking the EV company private (shout out to Azaelia Banks for trying to warn us all). Share prices dropped from $307.52 to $264.77.

As all investors know, past results are not indicative of future performance — but neither is press coverage or broader “hype.” There’s much that goes into perceived company value: delivering promised goods and services, research and development, thought leadership, geopolitical factors, reputation and, well, “personalities.” With so many moving parts, perceived stock value is subject to change on a whim. It isn’t clear how the unpredictability of Facebook, Tesla, and the likes will play out in 2019, or if there will be measures set in place to combat the constant ping-pong effect. As always, we’ll be keeping a close watch on how media influences finance and vise versa.

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