With all the buzz around sky-high valuations for collaborative economy and messaging startups, you may have missed that publicly held social media stocks had a pretty terrible year in 2014. The 11 U.S. stocks in the social media industry--including those in categories such as social networks, ratings and reviews, community platforms, relationship and content management and collaborative economy--lost 19.2% compared to a NASDAQ increase of 14.31%. Of the eleven stocks, just one outperformed the market, only three gained in 2014 and half lost more than a quarter of their value.

Chart from Yahoo Finance

What does it mean that social media companies are sagging? The problem certainly is not stagnating adoption. Despite the negative press about teens and Facebook, the social network continued to add active users at a steady pace in 2014. Same with Twitter and LinkedIn. And a study by Localytics found that time spent with social media apps rose almost 50% between 2013 and 2014.

So if consumers are continuing to integrate social media behaviors into their lives, why are stock prices falling? The same reasons any stock falls:

• Investors were over-optimistic: Being too optimistic too quickly within a new category is what investors do. They did in the Web 1.0 era and now they are repeating the mistake in the Web 2.0 era. People seem to forget the past; for example, in the two years following the dot-com bubble burst in April 1999, Ebay lost over 60% of its value and Amazon fell over 90%, while at the same time, hundreds of other Internet firms failed outright. The decline in social media stock value was completely foreseeable--in fact, back in December 2011, I predicted a "slow motion social media valuation bubble burst" (although, to be fair, I also predicted Facebook's stock price would fall in 2014, and I didn't get that right.)
    
• Financial performance disappointed the market: Considering the amount of time people spend with social networking, you'd think making money would be easy. Turns out it is not. Just three of these 11 companies have a P/E ratio, because only three of them have any E. (That means, only three have earnings in the trailing twelve months--Facebook, HomeAway and Yelp.) Almost three-quarters of these companies are still trying to consistently remain profitable; for example, on a GAAP (Generally Accepted Accounting Principles) basis, Twitter continues to see consistent quarterly losses (although on a non-GAAP basis they have reported quarterly profits). While Groupon, LinkedIn, HomeAway and Yelp flirt with their break-even points, many social companies are nowhere near profitability--at the current rate, Jive may get into the black before the end of 2015, but the same cannot be said for Zynga, Bazaarvoice and Marketo, based on their recent quarterly earnings trends. Facebook is the only social media stock that has been able to demonstrate consistent and growing profitability as of yet. 

I thought it would be interesting to examine the top 50 brands on Twitter and compare their financial performance with that of the broader stock market. I hoped to demonstrate that follower counts do not matter, but the exercise of tabulating these top Twitter accounts proved even more interesting and challenging than expected.

For this exercise, I started with Socialbakers' list of the top brands on Twitter as ranked by their follower counts. I eliminated any Twitter accounts associated with privately held or nonprofit organizations. (You'll find a list of the accounts eliminated at the end of the chart below.)

I quickly ran into questions of the best way to compile this list, because the top accounts do not necessarily correlate to corporations. While Twitter accounts like Starbucks and Dior are straightforward (since both are public corporations), what about Duck Commander, the account for both the reality TV show and the company run by the Robertson clan? Should this account be associated with A&E (the network that broadcasts the show), Gurney Productions (the show's production company) or the LLC that sells duck calls? (I decided the latter and eliminated it from the list as a privately held company.)

There also seems to be some issues with Socialbakers' rankings. For example, the @Google, @Instagram and @Samsung accounts are missing from Socialbakers' list of top brands on Twitter. It turns out they are all included in the "Media" and not the "Brand" category (a distinction I do not understand and cannot defend.)

Eventually I decided to use Socialbakers' top brand list (warts and all) and include any company with a top Twitter account. So, even though @Dell only has 290,000 followers, which would not be sufficient for inclusion in the top 50 list, Dell appears on the list because the @DellOutlet account has 1.45 million followers. Two other examples are Time Warner, included not because its corporate @TWC account has 59,000 followers but because @CNNMoney has 663,000 followers, and Walgreens, which is on the list because Duane Reade, which Walgreens acquired in 2010, has 1.8 million followers.

As a result, my list is not the top 50 brands on Twitter but the 50 public companies that have the most popular Twitter accounts based on followers, as defined by the Socialbakers' list.

Looking at the list below, I drew a couple of conclusions:

• The companies and brands that have the most followers do not necessarily outperform the market:  I have often repeated that Twitter followers and Facebook fans are a lagging indicator and not a leading indicator of success--they represent past success and not future prospects. Depending upon your interpretation of the data, this theory seems validated by the numbers.
  
  While the average performance of these companies in both the one- and five-year timeframe is much better than the S&P 500, these companies' performance is remarkably similar to the broader NASDAQ market index. And when you consider the median performance (which eliminates the effect from a couple of very high performing stocks and considers the more typical companies in the list), the performance is significantly below the NASDAQ index. It is hard to make the case that more fans are a predictor of future performance, based on this list; if anything, once one considers both average and median performance against both the broad and narrow stock market indices, it seems companies with lots of fans are quite average performers.
   
• The world is, indeed, flat: If you expected this list to be dominated by US companies, you would be only partially correct; the list of companies is far from universally American. Of the 50 companies on the list, 36% are traded on the NYSE, 34% on NASDAQ and the rest are found on overseas exchanges or over the counter. Roughly a third of the firms are headquartered overseas, including Sony, Samsung, Dior, Burberry, KLM, Louis Vuitton, Kering, STC and Etihad Etisalat. (On the other hand, when brands have different accounts dedicated to English and other languages, the English accounts tend to attract a great deal more followers.)
   
• The playing field is (more) level: It is clear that size matters in some industries, such as CPG, dining and retail, with larger firms such as Coke, Pepsi, Target, McDonald's, Yum Brands, Starbucks, Victoria's Secret and H&M scoring many fans. In other categories, however, size is far less important; for instance, while the expected tech giants can be found on this list, so are several small game developers. In addition, if you glance at the popular Twitter accounts excluded because they are not associated with public companies, you will find that nonprofits and privately held style brands possess a significant portion of the most popular Twitter accounts.
   
• Twitter is for geeks and fasionistas: It isn't surprising that tech brands (Apple, Microsoft, Google) and digital games (EA, Activision Blizzard) would amass many followers on Twitter. What was more surprising to me (which may speak more to my fashion sense than my Twitter awareness) is that high-end style brands--the kind not common in most closets--are so popular. All told, technology, gaming and style companies represent roughly half of this list. 

	Twitter Followers	5-Year Stock performance (2/20/09 - 2/14/2014)	1-Year Stock performance (2/19/13 - 2/14/2014)	Symbol
Samsung Electronics: - Samsung Mobile - Samsung Mobile US - Samsung Camera	7160736 5041152 849635	154.60%	-13.15%	KRX: 005930
Starbucks - Starbucks Japan	5734238 872655	640.67%	38.08%	NASDAQ: SBUX
Apple: - iTunes - App Store	5416851 2411572	448.60%	18.22%	NASDAQ: AAPL
Google: - Android - Google Chrome - Gmail - Google Play - Google Maps - Android Dev - Google Dev - Google Drive - Google Nexus - Android.es	4560669 3603867 3291622 2628216 1983479 988146 790350 707149 689482 675279	236.28%	51.70%	NASDAQ: GOOG
Dior	4316848	232.51%	12.61%	EPA: CDI
Microsoft - Windows - Skype - Xbox - Windows Phone - Office	4137169 3473323 3341881 2758977 1160997 658371	97.07%	34.31%	NASDAQ: MSFT
Blackberry: - Blackberry Help - AyudaBlackBerry	3919123 1411775 645716	-81.49%	-36.56%	NASDAQ: BBRY
Whole Foods	3626975	949.20%	18.59%	NASDAQ: WFM
Sony: - Playstation - Sony - Playstation Latam	3550534 2028492 669457	-7.78%	18.97%	NYSE: SNE
L Brands - Victoria's Secret	3520452	576.04%	24.90%	NYSE: LB
H&M	3170449	76.96%	27.17%	STO: HM-B
Nike - Nike.com - Nike Football - Nike Basketball - Nike Soccer	2744223 2193198 1740761 1022047 800153	245.71%	36.62%	NYSE: NKE
Intel	2741156	78.35%	17.24%	NASDAQ: INTC
Burberry	2654293	451.74%	10.78%	LON: BRBY
LVMH: - Louis Vuitton - Louis Vuitton US	2481782 1015426	177.45%	1.35%	EPA: MC
Pepsi	2477044	48.54%	5.99%	NYSE: PEP
Coca-Cola	2313833	77.60%	4.04%	NYSE: KO
Take-Two Interactive: - Rockstar Games	2295689	145.63%	26.72%	NASDAQ: TTWO
McDonald's	2200076	68.60%	2.00%	NYSE: MCD
Electronic Arts - EA Sports	2064856 650880	62.91%	62.52%	NASDAQ: EA
Walgreens: - Duane Reade	1857691	147.91%	57.42%	NYSE: WAG
Kering: - Yves Saint Laurent - Gucci	1840992 999689	257.97%	-11.45%	EPA: KER
JetBlue	1791023	46.23%	41.63%	NASDAQ: JBLU
Amazon: - Woot - Amazon MP3 - Amazon	1641620 1599460 943181	464.89%	34.80%	NASDAQ: AMZN
Twitter: - Safety - Mobile Support - Feedack by Tweet - Twitter Design - Ayuda y Soporte - Verified Accounts - Twitter for News - Translator - Twitter Nonprofits - Twitter TV	1630116 1329023 1250380 1243135 1138551 1046322 967131 952000 865642 858952	27.93%	27.93%	NYSE: TWTR	*
Southwest Airlines	1614523	192.18%	83.62%	NYSE: LUV
Adidas: - Adidas Originals - Adidas Football - Adidas	1545043 816417 733492	219.69%	23.68%	ETR: ADS
Dell: - Dell Outlet	1448566	51.97%	0.36%	NASDAQ: DELL	**
Nokia	1234404	-40.80%	78.95%	NYSE: NOK
Ubisoft	1213302	-4.78%	46.09%	EPA: UBI
Verizon Wireless	1098115	57.34%	4.75%	NYSE: VZ
Monster: - Monster Energy	1067761	305.84%	40.15%	NASDAQ: MNST
Target	1060610	86.37%	-9.16%	NYSE: TGT
Yum Brands: - Taco Bell - Pizza Hut	1038182 729017	151.96%	14.74%	NYSE: YUM
HTC	980663	-65.98%	-52.85%	TPE: 2498
Activision Blizzard: - Infinity Ward - Treyarch Studios	974383 937031	104.12%	37.79%	NASDAQ: ATVI
Sega	875179	129.55%	47.70%	TYO: 6460
Tiffany & Co.	866026	336.87%	36.09%	NYSE: TIF
Urban Outfitters	829082	117.27%	-13.18%	NASDAQ: URBN
Air France - KLM: - KLM	804814	17.46%	6.74%	OTCMKTS: AFLYY
Geeknet: - ThinkGeek	781952	84.74%	16.23%	NASDAQ: GKNT
STC: - STC_KSA	762334	57.93%	53.23%	Tadawul: 7010
American Airlines	739106	116.95%	348.43%	OTCMKTS: AAMRQ
CBOE	727238	81.59%	56.59%	NASDAQ: CBOE
American Express	698949	465.44%	44.27%	NYSE: AXP
Etihad Etisalat Co - Mobily	694079	195.53%	24.16%	Tadawul: 7020
Foot Locker	692426	416.58%	16.23%	NYSE: FL
CNN Money	662131	151.06%	22.01%	NYSE: TWX
Audi	645323	2.73%	10.99%	FRA: NSU
Ralph Lauren	636793	324.98%	-10.04%	NYSE: RL
AVERAGE		183.61%	28.80%
MEDIAN		123.41%	22.85%
NASDAQ		176.60%	32.96%
S&P 500		122.37%	20.98%
Not publicly traded: Vine, Hootsuite, Chanel, ClaroRonaldo, Dropbox, UNICEF, Firefox, TOMS, Nimbuzz, Dolce & Gabbana, Twitter Movies, YouTube Creators, Subway, EMANSANGELS, Calvin Klein, Jumpman23/Jordan, Marc Jacobs, Charity Water, Forver 21, Nando's, Cines Unidos, WWF, Sephora, Verace, Armani, Christian Louboutin, American Red Cross, Travel Bargains, Gates Foundation, ABF Foundation, Red, Human Rights Watch, Aluminaid, JustUnfollow, Greenpeace, Amnestry International, Gibson Guitar, DMedicalinfo, AirAsia/Tune Group, CERN, Ike's/IkesLove, UnfollowTT, GoPro, Save the Children,  Roberto Cavalli, TwitBird/Nibirutech, Kickstarter, Topshop, OneCampaign,  Gearbox Software, Mayo Clinic, Mojang Team, Non-Violence Project Mexico, Beautylish, Duck Commander, Odontosalud, Hotel Deals Weekly, Spotify, Chak89,  Stella McCartney, Do Something, tenki.jp, Global Network for Rights and Development, Klout, Greenpeace Brasil, Estetica y Salud, Harvard Health, Hollister Incorporated, Diane von Furstenberg, Valentino

* Twitter since 11/8/2013
** Dell: 2/20/09 to 10/29/13 (when it went private)

Anyone can create a list of predictions for the coming year, but I wanted to do something different. After seeing the return of Brian to Family Guy courtesy of Stewie's time machine (apparently Seth MacFarlane never learned the number one rule of Hollywood,"Don't kill the dog"), I decided upon my approach. I traveled forward in time to December 2014, stole this blog post off my PC and can share--one year in advance--the year that was (or will be) for social media, particularly Facebook.

(Disclosure: Although it may ruin the illusion, now is a good time to point out that time travel is not real, I am not offering financial or investment advice and the predictions and opinions expressed below are my own. This is a work of speculative, albeit informed, fiction.)

================

2014 in Review: Facebook's Very Bad Year

The past year has certainly been quite the wild ride, hasn't it?

A surprising number of social services had a bad year. Vine withered as consumers adopted more flexible sharing platforms. The answer to "Is Quora still around?" is "Yes, but only in Asia." Tumblr tumbled as users fled the appearance of advertising on the network (and as Yahoo improved its ability to spot and delete porn). Snapchat has lost $3,500 of value every second since turning down Google's $4 billion offer in late 2013--its current valuation stands below $2 billion, a steal at just 1,000 times this years' revenue, wouldn't you say? Twitter, despite steady increases in users, time and tweets, saw its stock fall as the typical post-IPO hangover set in. Meanwhile Google+ is still doing as well as any Google social strategy to date, which is to say quite modestly.

While some tech companies had a bad year, for others, 2014 was fatal. Groupon is hanging tough (although it gave up much of its 2013 stock surge as its string of flat quarters and after-tax losses continued) but LivingSocial is no longer among the living. I will not mourn the loss of LivingSocial, but I feel a bit sad to see Barnes and Noble's Nook throw in the towel. The retailer deserves credit for trying to innovate, but they just could not compete against iPads, Androids and Kindles. With the book closed on Barnes and Noble's digital strategy, the retailer now seems poised to follow Borders to the great bookstore in the sky.

Facebook's year has perhaps not been as bad as LivingSocial's or Nook's, but 2014 has been quite painful for the folks in Menlo Park. Facebook started the year on a high, with its stock selling more than 50% above its IPO price, but the company is ending 2014 in a very dark place. After briefly exceeding a price of $70 per share, Facebook's stock is now back to its mid-2013 level.

The social network still welcomes around 1.5 billion active users on a monthly basis, so it isn't exactly on the ropes, but questions dog Facebook on three fronts: Declining active users in developed markets, a deceleration in the growth of advertising revenue and a lack of diversification in its business model. While many could not see it at the start of 2014, the seeds for Facebook's rough year were planted and already blooming at the start of the year.
 

Users, Loyalty and Trust

Facebook's long march toward worldwide saturation has ended. The company, which as recently as two years ago could reliably post more than 6% quarterly increases in monthly active users (MAUs), was barely able to grow its worldwide MAUs in the last two quarters of 2014. Even more concerning, for the first time ever, Facebook saw a decline in MAUs in North America.

None of this should have been a surprise, since Facebook acknowledged in October 2013 that the company was seeing "a decline in DAU (Daily Active Users) among younger teens in the United States." As has happened time and again since the dawn of the digital era, teens' communication habits influenced those of older demographics, and thus use of new mobile and sharing apps grew in every age category. WhatsApp, Kik, TinyChat and Pheed all increased active users by 150% to 300% in the US in 2014, and it seems 2015 will be the year for one of these mobile sharing apps to emerge from the pack.

While investors may have shrugged off Facebook's late 2013 warning about teen usage, it was clear the company was deeply concerned; this is why Facebook was willing to extend a $3 billion offer for SnapChat. Although SnapChat does not publicize its user numbers, several tech writers (such as those at Buzzfeed, GlobalWebIndex and TechCrunch) estimated the service had just 10 to 25 million active users at the time of the offer. If accurate, that means Facebook was willing to pay at least four times more per user than it did for Instagram in 2012--quite a premium for a service that had no revenue and was plagued with questions about bullying, sexting and predatory behavior.

While Facebook was willing to spend lavishly to retain teen users, in other ways, it was remarkably complacent about user issues back in 2013. The company showed no sign of urgency, even though studies demonstrated Facebook was less trusted than any other company to protect consumers' data and the social network earned rock-bottom scores for customer satisfaction. While teens started flocking to other services where they could better control who could see their pics and posts, Facebook did little to improve posting control or its news feed; in fact, a significant news feed improvement announced in March 2013 was quietly abandoned before year end. Distrust, dissatisfaction and diminishing active users are a dangerous combination, and many now believe Facebook will face the long-anticipated "tipping point" in 2015.
 

Advertising Growth Slows

With Facebook's user base stagnating and limited opportunity to serve new ads to consumers before they rebel, Facebook's advertising revenue began to get squeezed in 2014. Revenue continued to grow at a healthy pace in early 2014, but by midyear top-line growth was slowing. Why? Many marketers were not happy with the results delivered by their ad spend on Facebook and email continued to deliver considerably better results than Facebook ads.

Of course, mobile advertising is still a bright spot for Facebook, but just as had occurred on the desktop in 2012 and 2013, the pace at which Facebook mobile advertising was rising began to slow in 2014. The number of ads that can be served to consumers on their mobile devices and the price advertisers are willing to pay both show signs of approaching peak levels.

Faced with advertising saturation, the only solution to keep ad revenue growing was for Facebook to offer new advertising products for which marketers were willing to pay larger sums. This meant, for example, the launch of auto-run video advertising in consumers' news feeds. The reaction to these ads was not, to say the least, very positive. Consumers, already unhappy with advertising on the social network, objected to the distraction of the moving ads, the impact on PC and phone performance and the additional unwanted data throughput that sucked up too much of their monthly data plans.

Almost immediately, people began posting on Facebook links to new ad-blocking browser addons and instructions for how to prevent Facebook's Flash ads from running. (Ironic that the same power Facebook gives users to share is now being used to reduce Facebook's advertising results, huh?) Auto-running video ads were just one step too far for many users, leading to more complaints and more abandonment.

As we enter 2015, Facebook may have the sort of revenue growth that other sites would kill for, but the rate of growth is slowing. This is bad news for investors who earlier in the year had been willing to pay a price-earnings ratio of more than 140, substantially greater than Apple's P-E of 14 or Google's 32. With slowing growth, the market reassessed the P-E premium at which the stock was trading, and Facebook shares took a tumble.
 

Lack of Diversification in Facebook's Business Model

The final issue that has investors vexed and undermines confidence in Facebook is the company's lack of revenue diversification. In 2011, more than 16% of Facebook revenues came from payments and other fees, but this percentage steadily declined as social gaming revenue lagged behind ad revenue growth, Facebook yanked its virtual credits program and the social network failed to sell physical gifts as part of its Gifts program. At the end of 2013, the company had never been more beholden to ad revenue, with slightly more than 10% of revenue coming from non-advertising sources, and in 2014 the situation worsened--the percentage of revenue from advertising now exceeds 91%.

Diversification is a vital factor that drives investor confidence and stock price, particularly for firms that rely on advertising. While advertising can furnish easy income for companies such as Facebook that amass many users, it also comes with profound risks. Just ask Excite, AltaVista, Geocities or Myspace how advertising worked for them. Or, check out print media, which is still struggling to deal with a decade-long collapse in newspaper ad revenue.

Investors buy stocks when they can see room for substantial and sustainable growth of the bottom line, but advertising revenue cannot grow indefinitely as users and page views stagnate. Facebook desperately needs to demonstrate non-advertising sources for growth in 2015 and beyond in order to again earn a higher P-E premium from investors.

In 2014, the sharing economy continued to grow, with firms like Airbnb, RelayRides, LendingClub and Prosper posting solid growth despite considerable challenges with the legal and regulatory environment and with slow consumer adoption. Meanwhile Facebook, the firm most responsible for bringing Web 2.0 services to the masses, has continued to sit on the sidelines of the sharing economy. While startups innovate with new and lucrative ways for the peer-to-peer (P2P) economy to grow, Facebook is mired with a stalling Web 1.0-style business model.

Perhaps this will soon change, as Facebook is rumored to be considering sharing economy acquisitions in 2015. (I'd humbly suggest TaskRabbit, a P2P marketplace for services, would make an excellent addition to Facebook's existing and sizable P2P social network.) Acquiring sharing economy firms that produce revenue by giving consumers services they welcome would be a long overdue move for Facebook, which for too long has relied on old-fashioned interruption advertising.

Facebook is also rumored to be considering an ad-free paid model, an action that would surely anger advertisers but could bring immediate diversification to the social network's income. Many folks are speculating about the price at which Facebook might offer its paid service, but if the rumors are true, Facebook can count on me to sign up for the $39.95 annual offering! (If, by the end of 2015, Facebook can encourage just 10% of its base to pay that annual sum, the company would diversify and boost revenue by around 40% this coming year!)

It's been a bad year for Facebook, with users beginning to abandon, advertising reaching saturation and no diversification to appease the restless market, but I certainly wouldn't count out Facebook in 2015. Zuckerberg and Sandberg deserve the lumps they have taken in the media this year for failing to address Facebook's problems before they developed, but the two leaders still have a chance to turn things around. With better usability, less onerous advertising and new programs that bring sharing economy products and services to its 1.5 billion users, Facebook could look like a reinvigorated company by the end of 2015.

It wasn't supposed to be this way. Those seemingly random ads that appear on the right side of your Facebook news feed were supposed to be hyper-relevant, super interesting, laser targeted and perfectly suited to each users' interests. At least, that's what Facebook said in its IPO, hyping the social network's ability to allow advertisers to target "specific interests that (users) have chosen to share with us on Facebook or by using the Like button around the web."

The word "relevant" appears 38 times in Facebook's Registration Filing, but relevance is not what Facebook advertising is delivering, is it? In the last week, friends like Forrester Senior Vice President Josh Bernoff have complained of seeing ads offering jobs in restaurants and New Yorker Nate Elliott was served ads for real estate in Denver. And in an example of retargeting rum amok, I continue to get ads for mens' shavers even though I shopped online and purchased one a month ago.

How did it come to this? The problem is that Facebook did not do anything to protect the value of the "like." Had brands collected authentic "likes" from authentic "fans," that data could have supported advertising based on actual consumer preferences. Alas, brands raced to collect meaningless fans and Facebook allowed the practice, so we find ourselves at a place where no one is happy--brands complain of their inability to reach all those meaningless fans without opening up the checkbook and users cannot rely on friends' "likes" as a meaningful signal of which brands they love versus which brands simply ran a sweepstakes on Facebook.

The biggest loser in this situation may be Facebook, itself. It strove to change the face of advertising, just like Google did a decade earlier. While other sites raced to amass "eyeballs" to which they could deliver ads, Google focused on serving the right ad to the right person at the right moment. In the end, those sites that chased eyeballs died while Google commands more than four out of every ten dollars spent on online advertising. That's what happens when you create a new, more relevant ad channel.

Facebook has not yet furnished a new, more relevant ad channel, and you can tell that even Facebook recognizes the situation. Gone is all the talk about "likes" creating bold, new ad targeting options; instead, Facebook today largely pushes the same sorts of digital advertising products as everyone else. You can upload your hashed email addresses to retarget ads to custom audiences. You can target your audiences demographically or by broad interest. And in Facebook's most recent announcement, you can serve ads to people who visit your websites or use your mobile apps.

If all that sound familiar, it is because it is--these ad options are little different than popular websites and ad networks have been offering for years. Of course, there's nothing wrong with selling "eyeballs" rather than evolving advertising in bold new ways, particularly when you have a monumental number of eyeballs to sell, but this puts Facebook advertising in the same competitive space as every other online ad option. While Google can command a premium for reaching people in ways advertisers find valuable, Facebook is offering substantially the same ad opportunities as Yahoo, CNN and other high-traffic sites.

For now, the undifferentiated ad strategy is serving Facebook well--it has doubled its stock price in the past three months, finally surpassing its May 2012 IPO price. But while many are bullish on the future of Facebook's stock price, I remain less so. (This is a good point to mention, I suppose, that I am not a financial advisor and the opinions expressed here are my own.)

Facebook is currently selling at a price/earnings ratio of 194 compared to Google's 27 and Apple's 13. The company has to increase its bottom line 700% to 1400% to bring its price/earnings ratio into the territory of comparable firms. While investors have cheered recent improvements in Facebook's earning, it is worth noting that the company's net income before taxes was up less than 10% in the first six months of the year. Investors may continue to buy Facebook stock at a tremendous price/earnings premium based on optimism, but that will not last forever; Facebook will have to deliver profound net income growth to keep its stock rising in the next year or two.

How can Facebook do this? With Facebook's user growth stagnating as the social network approaches saturation, revenue and income growth can only come from a limited number of different sources:

• More ads: More ad impressions mean more ad revenue, but can Facebook continue to push more ads at users? We will likely find out, as Facebook may soon bring auto-run video ads to users' news feeds.  Given the increasing level of grumbling, serving even more ads to users seems a dangerous route, and Google+ and others would be happy to welcome today's social addicts if Facebook starts down the same path that doomed Friendster and Myspace.
    
• Better ads:  Better ad opportunities can draw more of brands' ad budgets. This is why Facebook continues to evolve its ad platform with new products, and of course, the growth of usage and advertising on mobile is a bright spot for Facebook. Still, as Facebook mobile advertising becomes more common and familiar, the clicks (and ad prices) are likely to stagnate (which is exactly the same well-worn path that online ad performance and pricing has taken over the past fifteen years). In addition, while it is too late for Facebook to reclaim the value of authentic "likes," the company may yet be able with better text analytics and data mining to turn our posts and interactions into more valuable advertising for both users and marketers.
   
• Different revenue streams: The best option for Facebook, in my opinion, is the one least evident in Facebook's recent actions, and that is for the social network to offer value-added non-advertising services that users would welcome. Facebook has tried and largely failed with offerings like gifts, but that doesn't mean this or other strategies may not be lucrative ways for Facebook to drive revenue diversification, income growth and higher stock prices. The growth of the sharing economy is one of the most profound changes occurring today, with double-and triple-digit growth for peer-to-peer companies such as Airbnb, RelayRides, Prosper, TaskRabbit and Lending Club. Today, the world's largest social network is sitting on the sidelines, but if it cared to innovate its business model as much as its advertising offerings, it could yet enter the peer-to-peer space in a way that would bring additional revenue streams for Facebook.

Facebook's IPO Registration Statement began with these words:  "Our mission is to make the world more open and connected." That is something the company has clearly achieved, but I see little of its mission evident in the company announcements in the past year or two. New advertising products may be cheered by Wall Street, but they do not make the world "more open and connected."  I hope Facebook does not forget its mission, because a world that is more open and connected economically is one that offers great benefits to consumers and Facebook alike.

On May 18 of this year, Facebook stock debuted on NASDAQ at $38 per share. Last week, three months later, it was selling for half that price. As the stock has plunged, questions about CEO Mark Zuckerberg's leadership have risen. Late last week, the LA Times asked "Is Mark Zuckerberg in over his hoodie as Facebook CEO?," a swipe at the attire Zuckerberg famously wore on the day the stock launched. CNET Columnist Ben Parr received an email from an attorney's PR firm promoting his drive to force Zuckerberg out. And even Perez Hilton got into the act, taking a break from scribbling on celebrity photos to ask, "Should Mark Zuckerberg Step Down As CEO Of Facebook?"

Should Zuckerberg step down? That is up to him to answer. Zuckerberg could certainly follow in the footsteps of Twitter's founders who stepped aside to allow a more seasoned leader to take the helm, not that the sailing has been that smooth over at Twitter since the transition. Under Dick Costolo, Twitter has alienated its developer community and violated its long-standing commitment to free speech by encouraging NBC to request the suspension of a critic's Twitter account. Although Twitter's revenues are rising, they reportedly lag Facebook's revenues considerably. It is difficult to evaluate Twitter's performance since it remains privately held, but the company's SecondMarket valuation was downward trending this year until rumors surfaced of Apple's interest in a share of the microblogging network. The point is that, while CEO leadership is important, CEOs are not miracle workers (no matter what you may have read about Marissa Mayer).

Whether or not Zuckerberg should step down is a question only he can answer. But need he step down or will he be forced to do so? If you think this, you have not been paying attention. Here are three reasons why Zuckerberg's position is secure:

1. It is his damn company: As noted on this blog six months ago, Facebook's S-1 IPO filing could not have been clearer about the control Zuckerberg wields at Facebook. After the IPO, Zuckerberg owned 56.9% of the voting shares, and the IPO took pains to warn investors what this meant. It noted Facebook would be a "controlled company" and that "Our CEO has control over key decision making as a result of his control of a majority of our voting stock." In case this was not clear enough, the IPO also included this comment: "Mr. Zuckerberg will be able to effectively control all matters submitted to our stockholders for a vote, as well as the overall management and direction of our company." Facebook's CEO, much like the social network itself, came with a "Like" button but no "Dislike" button, and there is virtually no chance Zuckerberg can be forced from his position running Facebook. If he steps aside, the decision will be entirely his own.
     
2. Investors' unreasonable expectations and mistakes are not Zuckerberg's responsibility. If you thought Facebook was going to be a safe or strong short-term stock, you were truly misguided. The stock debuted at a price that represented a PE ratio (price/earnings ratio) of 95. At the time, successful tech companies like Apple, eBay, Microsoft and IBM were trading at PE ratios of less than 16. In other words, Facebook was going to need to grow its net income 500% in short order to justify its price, much less create positive market momentum. (The first person who says, "Earnings don't matter" will be sentenced to go back in time to March 2000 to relive the dot-com bubble burst and learn what he or she should have the last time around.) If you are looking for someone to blame for the fact the shares were overvalued, then pick on analysts at firms like Sterne Agee, Needham & Co. and Wedbush Securities, all of whom rated Facebook a "buy" in May and suggested target prices in the $40s. As far as I'm concerned, there has been nothing surprising about Facebook's stock performance since its IPO, and if you think I am Monday morning quarterbacking, feel free to check out my blog post from December 2011 when I predicted the continuation of the "slow-motion social media valuation bubble burst." Or, heck, go back even earlier when in June 2011 I noted that Facebook or Twitter "could pull an Amazon, lose 90% of their market cap and spend another decade clawing their way back."
     
3. Facebook's financial performance under Zuckerberg has been exactly as expected. The sinking price of Facebook shares has far more to do with investor perception than with company or CEO performance. In July, Facebook's first quarterly filing as a public company "just squeaked in at analysts’ expectations." That included an almost one-third rise in quarterly revenue in a year, a 32% year-over-year increase in Daily Active Users and a 67% increase in Mobile Monthly Active Users. On a non-GAAP basis (the way the market evaluates Facebook), the Earnings Per Share were level with the year prior, which is not surprising given the company is still fueling worldwide growth with a 50% increase in headcount and a two-thirds increase in capital investments. Overall, while Facebook's lack of earnings growth may disappoint the street, the company's performance is on track for what market watchers expect. Compared to Zynga, which recently slashed its earnings estimates for 2012, Facebook looks like a solid, growing, successful, well-run, young company. 

In short, it is pretty darn tough to see how Zuckerberg would be forced out from his CEO position considering he controls the company and is delivering the financial results expected. This is not to say that I think Zuckerberg has been a good CEO in recent years. I have railed against Facebook's lack of revenue diversification and innovation, and its focus on advertising rather than facilitating new social business models has been, in my opinion, a serious blunder in long-term strategy. Moreover, as my former Forrester peer Nate Elliott noted, the company has not delivered the sorts of marketing metrics that marketers need to justify greater investment in Facebook advertising.

Even more concerning is that Facebook's desperation to quickly grow revenue and income seems to be pushing the company away from Zuckerberg's own core beliefs. As David Kirkpatrick, the author of The Facebook Effect, noted in the early years of Facebook, Zuckerberg "resisted pleas to turn Thefacebook into a highly commercialized ad platform, because he thought users would dislike it." Facebook's CEO continued to show ambivalence and concern about advertising years later when in 2010 he said, "There’s a big misperception that we’re making these changes for advertising. Anyone who knows me knows that that’s crazy.”

It is hard to square Zuckerberg's stated vision with the actions of the company this year. Facebook seems to be exploring some very dangerous and unpalatable waters, such as charging users to have their posts seen by more of their own friends and permitting advertisers to place ads in users' news feeds even if those users have not "liked" or given permission for those advertisers to do so. Moreover, Facebook's new Reach Generator threatens to push aside content users want to see in favor of content advertisers want them to see.

I do expect more out of CEO Zuckerberg, but that has more to do with my expectations around social business models and strategy than with the company's 2012 financial performance. In the end, however, what I or anyone else thinks is meaningless. The world can "poke" Mark Zuckerberg as much as it wants, but he and only he will make the decision when the time is right for a new CEO.

Social media professionals and their bosses take some things for granted. For example, having more Facebook fans is always better than having fewer. Hard to argue with that; the more Facebook fans you have, the stronger business results will be, because fans are happy customers. Plus, every fan acquired is another person who can be targeted for marketing with low-cost Facebook posts and apps.

It makes perfect sense. It also happens to be wrong, at least as evidenced by an analysis of 40 top brands with some of the largest Facebook fan counts. For these brands, there is a negative correlation between fan count and customer satisfaction and no relationship whatsoever between fan count and stock performance.

Do I think these results truly mean that Facebook fans have no (or even negative) value? Of course not, but there are vital lessons to be learned from this analysis: We put too much stock in the importance of our brands' Facebook fan counts; how you get fans is more important than merely having fans; and most companies are still doing social wrong.

Analysis: Correlating Facebook Fans, Customer Satisfaction and Stock Performance

I examined a set of 40 companies, chosen because they are the top 200 corporate brands on Facebook (based on fan count) that are both tracked by the American Customer Satisfaction Index (ACSI) and publicly traded on the NYSE, NASDAQ, Frankfurt, Tokyo or Taiwan Stock Exchanges. By focusing on three attributes--Facebook fan counts, customer satisfaction ratings and 12-month stock performance--it is easy to calculate the statistical correlations between these variables.

Out of the top 200 corporate brands, 160 were eliminated for one of three reasons:

1. The ACSI does not track the brand's customer satisfaction rating. This precluded major brands with large Facebook fan pages, such as Disney, Red Bull and Converse. 
2. The brand is part of a privately held company and thus lacks market performance data. Brands such as Subway and Levis were omitted for this reason.
3. The brand is only one of many owned by the parent company, and as a result, individual stock performance data is not available. For example, Taco Bell, Pizza Hut and KFC all have large fan pages but are collectively owned by YUM! Brands, so no stock market data is available for each of the individual brands. Also, despite having large fan counts, Bing and Xbox were not included since they are relatively small portions of Microsoft's business operations, but Microsoft itself is included in the list since it has a large fan count and is publicly traded.

Every brand lusts for the sort of enormous Facebook fan counts that these brands have accumulated, but as it turns out, these large large fan bases have no statistical association with either customer satisfaction or business results as valued by the market. Looking at the correlation coefficient (where 1 is perfect positive correlation, -1 is perfect negative correlation and zero is no correlation at all), here is what statistical analysis demonstrates:

• Modest negative correlation (-0.3) between Facebook fans and customer satisfaction:  ACSI Customer Satisfaction Scores for these brands ranged from Facebook's dismal 61 to Amazon's strong 86. Overall, large Facebook fan counts are not correlative with customer satisfaction; in fact, there is a negative correlation between the size of a brand's Facebook fan base and its ACSI score, at least among these top 40 brands. My suspicion is that this is related to the manner in which some large brands amassed fans, many having lured fans with giveaways and freebies rather than superior products or customer service. (I'd also speculate that a larger study might find the same trend, since people tend to be more satisfied with smaller, locally owned companies versus large international conglomerates.)
     
• No correlation (-0.1) between Facebook fans and stock performance: The data did not reveal any correlation between the size of a brand's fan count and its 12-month stock performance. Among these top fan pages you will find brands like Walmart, Hershey and eBay, with share prices up more than 25% in the past twelve months, but you will also find companies with stocks that have dropped more than 35%, such as Research in Motion, Nokia, Facebook and Best Buy. On average, the companies in this list saw share prices increase just 2.9% in the past 12 months, lagging the major market indices (such as NASDAQ and the DJIA), which are up 6.6% to 6.9%. There is no evidence that investors care about large Facebook fan bases or that having large numbers of fans enhances business results in a way that investors notice or value.
    
• Weak positive correlation (+0.2) between customer satisfaction and stock performance: Not surprisingly, real affinity mattered more than the fake variety represented by Facebook fan numbers. For these 40 brands, there is a slim but positive correlation between the companies' ACSI ratings and their stock performance in the past year. Satisfied customers tend to result in satisfied shareholders.
    

The companies included in this analysis and the data collected can be found at the end of this blog post. 

Recommendations: Social Media that Matters

Based on this evaluation, some conclusions may be drawn that can assist your brand's social media efforts:

• Stop Using Fan Counts as a Measure of Social Media Success: Working to increase fan counts without consideration for brand affinity can lead to activities that hurt rather than help. If you strive to collect Facebook fans that have true affinity with your brand, your fan growth may be slower, but you will be rewarded with authentic fans with higher EdgeRank; these are fans that see and engage with your content and are more likely to make their friends aware of your products and services. But if you resort to trickery such as sweepstakes and game giveaways, you end up collecting fans with little affinity and low EdgeRank. These faux fans are unlikely to see your content or speak on your brand's behalf, which means you will have invested your company's budget without having delivered business results.
     
• Do Not Blindly Trust Published Studies (Except This One):  There are many "studies" that are unleashed on the blogosphere for the purpose of PR and not enlightenment. Use judgment as you read blogs and press releases, and do not mistake assumptions and opinion for facts and data. (This is why I shared the actual data: so that you can consider and verify the analysis for yourself. Plus, I have nothing to sell you!) For example, a while back, a social media management provider got a lot of press by announcing Blackberry's Facebook fans were worth $240 million to the company--$83.98 apiece. Social media bloggers and presenters breathlessly repeated this figure without stopping to consider if this was plausible. To put that figure into perspective, Sprint has 56.4 million subscribers and a market cap of $12.9 billion, which means investors value Sprint's actual paying customers at $228.72 apiece. Does it make sense that a real, paying, contracted subscriber is worth $228.72 while an individual who clicked a "like" button is worth $83.98? Of course not, as evidenced by Research in Motion's results in the two years since this crazy fan valuation figure was announced: Revenue has dropped 39% and the firm lost $20 billion in market valuation. RIM's huge Facebook fan base did not prevent it from arriving on death's doorstep.
    
• Focus on Advocates:  You do have some customers who may be worth $83.98 to your organization; in fact, they may be worth far more than that. These are your advocates--people who spend more, recommend your brand and influence the purchase decisions of others. BzzAgent, in a study I find very credible, found that brand advocates create twice as much brand content, are 70% more likely to seen as a good source of information by others and are 50% more likely to influence a purchase decision. To be clear, advocates and influencers are different, as noted by Cara Fuggetta on the Zuberance blog. If you wish to pursue a PR-like influencer strategy, do so, but do not confuse this with strategies designed to meet the very different needs, wants and outcomes of your value-driving advocates.
    
• Scale to Create Satisfied Customers, Not "Fans": Which came first, the chicken or the egg? That philosophical dilemma has no answer, but I do know which comes first, a happy customer or a Facebook "fan." As evidenced by the correlation between customer satisfaction and market performance, brands are much better off increasing the number of satisfied customers rather than the number of their Facebook fans. There are ways to use social media to increase customer satisfaction; this is not done with sweepstakes and games but with in-channel responsiveness and functionality that satisfies customers' needs. In the past three months, I reached out to three national brands using Twitter--Dell, Sprint and Yahoo--and did not receive a response from any of them. Doing social at scale is not about the biggest marketing budget or the most fans--it is about having the right resources to meet customer expectations in the social media channel. 

Some folks claim that we have entered a stage of maturity in the social media era, but from where I am sitting, we are still barely taking baby steps. So many brands are desperately pursuing ROI and increasing their social media marketing budgets, but few are deploying the sorts of social business strategies that create happy customers and engaged advocates. There is too much focus on the click of a "follow" or "like" button and not enough on how social changes the brand/customer relationship.

Social media managers love large fan bases because they look good to the bosses, but it is how you get fans that matters, not that you merely have fans. To drive business value, invest in creating happy customers who want to be your Facebook fans, not in Facebook fans you hope will become your happy customers. 

Data: Top Publicly-Traded Facebook Brands with ACSI Ratings

Brand	Facebook fans (In millions)	Most Recent ACSI Score (2011 or 2012)	Percent share change in past year (as of 7/27/12)
Facebook (FB)	70.1	61.0	-37.6
Coca-Cola (KO)	45.9	85.0	16.3
Starbucks (SBUX)	31.1	76.0	18.7
McDonald's (MCD)	21.4	73.0	2.8
Walmart (WMT)	18.2	70.0	40.6
Target (TGT)	16.3	80.0	22.0
Blackberry (RIMM)	11.6	69.0	-71.0
BMW (BMW)	10.7	83.0	-16.8
Google (GOOG)	10.2	82.0	3.9
Nike (NKE)	9.9	80.0	7.2
Yahoo (THOO)	9.8	78.0	19.3
Adidas (ADS)	8.6	80.0	11.2
Nokia (NOK)	8.5	75.0	-63.1
Pepsi (PEP)	8.5	85.0	13.1
Amazon (AMZN)	7.9	86.0	6.0
Kohl's (KSS)	7.6	81.0	-10.7
Domino's (DPZ)	7.1	77.0	27.5
Dunkin' Donuts (DNKN)	6.8	79.0	6.1
Best Buy (BBY)	6.1	77.0	-36.4
Macy's (M)	6.1	77.0	26.0
Burger King (BKW)	5.4	75.0	1.8
Hershey (HSY)	5.3	84.0	27.0
eBay (EBAY)	3.4	81.0	38.1
Netflix (NFLX)	3.4	74.0	77.9
Southwest (LUV)	3.0	77.0	-10.6
Verizon (VZ)	2.9	70.0	27.2
JCPENNEY (JCP)	2.7	82.0	-25.2
GAP (GPS)	2.6	77.0	55.1
Chili's (EAT)	2.6	76.0	35.2
Hanes (HBI)	2.5	82.0	-2.6
Wendy's (WEN)	2.5	78.0	-0.4
Papa John's (PZZA)	2.5	83.0	64.3
AT&T (T)	2.3	70.0	26.9
HTC (2498)	2.3	75.0	-66.2
Honda (HMC)	2.2	85.0	-18.6
Walgreens (WAG)	2.1	75.0	-8.5
HP (HPQ)	2.0	78.0	-47.2
Microsoft (MSFT)	1.9	75.0	8.6
Dell (DELL)	1.9	77.0	-26.0
Sears (SHLD)	1.8	76.0	-25.6
		Average	2.9
		DJIA	6.8
		S&P 500	6.6
		NASDAQ	6.9
Correlation coefficients:
Facebook fans and ACSI Scoree	-0.3
Facebook fans and Stock changenge	-0.1
ACSI Score and Stock change	0.2