Have you ever thought about what you own when you buy a stock? Of course, you get ownership of the underlying company, but it is so much more than that. Finance is as much an art as it is a science.

Using Meta Platforms as our guide, I shed light on the art and science of finance, uncovering how the narrative surrounding a stock can influence its performance and how the fundamentals can, in turn, reshape the narrative.

An Art and A Science

A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called “shares” which entitles the owner to a proportion of the corporation’s assets and profits equal to how much stock they own. 

Adam Hayes via Investopedia

This conventional definition offers an academic perspective on stock ownership, emphasizing the scientific facet of finance. However, it is important to recognize that finance is not solely governed by formulas and calculations; it is also an art. The narrative surrounding stock ownership, which influences price movements on a day-to-day basis, represents the artistic side of the financial landscape.

The Narrative

The art and science of finance are interconnected. Each has the potential to influence the other. 

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Take, for instance, the relationship between FedEx and UPS. If one of these companies experiences a disappointing quarter, the other often sells-off as well. In this scenario, the negative fundamentals of one company exert an influence on the narrative surrounding the other without considering the latter’s fundamentals.

Let’s say Amazon’s quarter shows a reacceleration at Amazon Web Services (AWS). This development could indicate that the entire cloud industry is on the brink of a similar upswing, subsequently driving up Salesforce stock. Here, Amazon’s positive fundamentals influence the narrative surrounding Salesforce, triggering a rally despite the lack of immediate fundamental backing.

Another example is the narrative surrounding an enduring increase in AI-related spending, fueled by the advent of Chat GPT. Consequently, stocks like Nvidia and Broadcom experience a rally prior to their earnings announcements. In this instance, the stock prices of AI-focused companies benefit from the sector-wide narrative without demonstrating fundamental proof to support that narrative.

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The art lies in the uncertainty. At the moment of purchase, it is impossible to precisely determine how the narrative will unfold and impact the company. The stock’s performance hinges on how the narrative develops until the fundamentals provide a certain degree of clarity. Ultimately, it is the company’s fundamentals, often disclosed during earnings reports, that will either confirm or refute the price action influenced by the narrative. 

Concisely, while the scientific aspects of finance, the fundamentals, often have the ultimate say in a stock’s performance, it is the artistic dimension – the narrative – that predominantly shapes a stock’s short-term performance.

Case Study: Meta Platforms 

Meta Platforms (META) is a captivating case study as it has undergone significant narrative shifts in the past two years.

Red Period: The Fundamentals Shape the Narrative

Let’s begin with the red period from February to November 2022. During this time, earnings, a fundamental measure, played a pivotal role in changing the narrative. While META’s quarterly results exceeded expectations, discouraging guidance influenced by Apple’s IDAF privacy changes, regulatory challenges in the EU, and extravagant spending on unproven metaverse ventures triggered a major reassessment of the stock. As a result, META suffered an overnight loss of 26%. Previously regarded as a leading social media platform with a strong advertising business under the guidance of renowned founder-CEO Mark Zuckerberg, META was now seen as a struggling company facing existential challenges, placing its hopes in unproven concepts.

Over the following months, the stock continued its downward trajectory as the narrative grew bleaker. Despite pleas from influential shareholders to curtail metaverse spending and refocus on the core business, Zuckerberg remained steadfast in his unpopular strategy. In the October quarter, META delivered another disastrous result, justifying the negative price action associated with the concerning narrative. Eventually, META bottomed around $89.

Orange Period: The Narrative Front-runs the Fundamentals

This brings us to the orange shaded period between November 2022 and March 2023. Speculation arose that the steep decline had finally compelled Zuckerberg to adjust his approach. Reports circulated that significant layoffs were being considered to streamline the business and protect margins. As these rumors gained traction, the stock rallied all the way into the February 2023 report, where Zuckerberg announced a major shift in strategy introducing the “Year of Efficiency”. This report validated the price action spurred by the narrative, highlighting META’s newfound commitment to fiscal discipline. META transformed from a directionless company to one focused on cost-cutting and strengthening the core business. Notably, during this period, it was reports of layoffs – the art – that prompted the narrative change and reversed the downward trend without support from fundamentals. The reversal was sustained because the earnings – the science – validated the narrative-driven price move.

Green Period: The Fundamentals Proves the Narrative; The Narrative Evolves

Finally, let’s delve into the ongoing narrative that emerged in April and is unfolding in real-time in green. Analysts released research suggesting that META’s emphasis on Instagram and Facebook, coupled with the potential U.S. ban on TikTok, would spur organic growth. Suddenly, the narrative shifted from a cost-cutting story to a growth story. The stock rallied further into the next quarter, where Zuckerberg confirmed analysts’ hypotheses, leading to additional upside. Again, an artistic event – analyst notes – fueled a positive narrative that was later verified by a scientific measure – earnings. 

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In summary, if you have held META shares since February 2022, you have experienced ownership of a directionless company, followed by a cost-cutting company, and ultimately a growth company. Collectively, this represents one of the most remarkable turnaround stories in the past decade. Of course, throughout this period, you also held an ownership stake in a social media company, although that might not have been at the forefront of your mind when making the initial purchase or holding onto the shares. 

The Takeaway

When you buy a stock, you acquire two distinct components: ownership in the company and the accompanying narrative. Although the scientific aspect of finance, the fundamentals, tends to have the final say, there are instances where the artistic aspect, the narrative, becomes more significant. To be a successful investor, you need to thoroughly understand both.