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Why Google Need Not Respond to Facebook

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the wake of Facebook's (NASDAQ: FB) “Graph Search” announcement this week, which I covered,  I have seen a lot of hand-wringing, and a lot of people spinning this as the worst day ever for Google (NASDAQ: GOOG).

It's not. For Google, it's not really a big deal.

Why Graph Search is No Big Deal

First, as I noted right after the announcement, Facebook was building a moat here. This was a defensive move, not an offensive one. The idea is that, the more you use Facebook, the more value you get from searching the pages of your “friends.” It's a virtuous circle.

But if you aren't using Facebook, the value you will get from Graph Search will be limited. The “one more thing” at the press conference turned out to be Facebook defaulting to Microsoft Bing for its internal searches.

Second, Google already has “social search” embedded in it. When a Google Plus member conducts any search on Google after logging in to the service through Gmail, they will get social search. If someone has shared something about your search topic, you will see that among your early search results, and the link will be to their Google Plus post, explaining why they think the link is important.

As with Facebook Graph Search, this builds organically. The more Google Plus friends you have, the more likely this will appear.

Then there's the idea that Graph Search will give you ideas about which restaurants to visit. Well, Google has already integrated all its restaurant reviews into map search. If I ask for restaurants around my house, the map that pops up will also tell me how many reviews it has of each place. Lots of reviews makes for more reputable reviewing than the review of a single friend.

And who are these “friends” of which you speak, anyway? How many real friends do we have, as opposed to “Facebook” friends, or “Google Plus” friends. I've developed over 2,000 Google Plus relationships for work – I will tell them about this story, just as I will tweet it, looking for readers. Does this mean I “know” them, the way I “know” my non-tech neighbor across the street? Does it mean I trust them when I'm preparing a purchase?

Run the Numbers

Since the Facebook press conference the stock is actually up roughly 2% in price while Google is down about 1%. Why? I don't see any justification in the numbers.

For the quarter ending in December the three dozen analysts following Facebook expect earnings of 15 cents per share . Right now you'd pay about $30.25/share to get in on that. Revenue for the third quarter, ending in October, was barely half that of the June quarter. The one thing Facebook does have going for it are high operating margins, nearly 33%. Yet its actual profit margins are near zero, not a bad thing if you're expecting an accelerating top line, but as noted the record there is mixed.

For Google roughly the same number of analysts expect earnings of $10.62/share. You will pay about $711/share to get in on that. Top-line growth continues to average 20% per quarter, boosted this time by results from Motorola, but those sales hurt margins, because Google lost money on that asset during the last quarter, taking the hit of laying off a lot of people, severely paring the product line. Things may be better there this time out.

The forward earnings multiple for Facebook, in other words, is roughly three times that of Google. Justifying that requires that it blow the doors off with its numbers later this month. A few months ago I suggested that you wait for those January numbers before contemplating any Facebook investment, and then only pay a reasonable multiple of those earnings for shares.

Which means I'd be paying no more than $13/share for Facebook, based on current earnings estimates. It may have built a nice little moat with Graph Search, but what Facebook needs is a bazooka. And it didn't announce one Wednesday.


DanaFBlankenhorn owns shares of Google. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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