Brokers are hitting “like” on companies that have strong social media engagement, as UBS yesterday became the latest to factor Instagram influence into its ratings.
The Swiss bank announced that it will now track the performance of 19 luxury brands on Instagram and Google Search,tracking “social media heat”.
Analyst Julie Zhuang said there is a clear relationship between hype and organic sales growth.
According to UBS, the correlation between Italian fashion brand Gucci's organic sales growth and the year-on-year increase in Instagram likes per post is 76 per cent.
Meanwhile analyst John Stevenson of Peel Hunt told City A.M. that analysing social media has proved valuable for the broker since it began tracking the metric in 2013.
He added that it “goes a long way to show the differences between the more structurally challenged retailers such as New Look and House of Fraser and the ‘winners’ such as Joules, boohoo, Quiz and Missguided, who are clearly highly relevant to and fully engaged with their customer base”.
Jefferies has also monitored social media for over a year. Flavio Cereda, who covers the likes of LVMH, Moncler and Kering, said social media is “perhaps the most effective means to connect” with consumers.
Adam Tomlinson of Liberum said that the success of a brand’s social media “should be a key consideration when investors are forming their views”.
Berenberg also confirmed that it monitors social media as part of its analysis.
But retail analyst Richard Lim cautioned that although social media is now “critical”, investors must pay attention to the return on resources invested into platforms like Instagram.
“A big following doesn’t necessarily translate to sales,” he told City A.M. “There’s a lot of work to be done between having the following and curating the right narrative to form deeper relationships.”
Analyst Laith Khalaf echoed this, commenting that “a company’s social media presence and activity is not something which is easily convertible into pounds and pence”.
However the implementation of MiFID II has upped the pressure on brokers to move away from traditional equity research and look at new tools such as social media monitoring, according to Michael Horan, head of trading at Pershing EMEA.
“These tools can be used by analysts to create more innovative views which are more worthwhile to their clients,” he said. “This gives investors a fresh approach and perspective when they are considering whether to trade a stock, and also has the simple result of being more interesting to read.”