Graph Search Wasn't the Most Important News Regarding Facebook

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Last week, Facebook (NASDAQ: FB) announced the graph search function that grabbed the media attention for the rest of the week. Heated debates occurred on numerous media outlets on whether this search service would impact the likes of Google (NASDAQ: GOOG) and Yelp (NYSE: YELP). In the end, the stock sold off as the market isn’t as sold on the ability to monetize the service. 

The leading internet social media firm had surged to a market cap approaching $70 billion based on the expectations of a big announcement whether a Facebook based phone, a search function, or something more exotic. While the market focused on the actual search news and all other plans to monetize existing users on the platform whether PC or mobile based, the market appears to ignore that the company is not ensured to be the social media outlet of choice in the future. In fact, MarketWatch reported on the same day that Facebook had lost 1.4 million users in early December.

Is Graph Search even a big deal?

Part of the reason for the recent ramp in the stock from $25 to $32 in the last month or so has been due to the high expectations for the news event last Tuesday. The stock has sold off after the event mainly due to the normal tendency on Wall St. to sell on the news. The other reality is that the graph search function while intriguing didn’t provide actual monetization plans.

While the analysts bullish on the supposed game changing search option unveiled by Facebook, the one lacking part of the equation is that the searchable data is too restrictive. Do users really want to be restricted to search data by Facebook friends? Do users want to know the restaurant recommendations of old High School acquaintances that they spent the previous decades avoiding after graduation?

Sure the example of looking for friends that like trail running would be neat, but Facebook needs to monetize it. The logical answer would be to serve up an ad for trail running shoes. Users though aren’t looking for shoes, but rather a person to share an interest. If I wanted shoes, the user would be looking to go directly to Google or maybe read reviews on Yelp if related more to a store that sells running shoes.

Active users peaking a bigger issue

The bigger issue not addressed last week was the news that Facebook lost users in early December according to SocialBakers. Upon further research, it appears that the social website actually regained those users around the holidays to only lose them in early January. See chart below:

<img src="/media/images/user_15227/screen-shot-2013-01-18-at-40355-pm_large.png" />

As the MarketWatch article discusses, numerous users actually made a New Year's resolution to spend less time on social media including deleting Facebook accounts. As with all of the monetization plans of Facebook, the investment community always overlooks the number fact. All social networks eventually die whether a virtual network such as MySpace or a real world network of high school or college friends.

Stock performance

The stock performance since the day after the IPO has remarkably hit the flat line on Monday. Investors in the IPO or that bought on the first day of trading haven’t faired very well though. The stock that originally hit $45 remains considerably below those levels at below $30.

Conclusion

Remarkably, the analyst community and media outlets continue to fight over whether Facebook deserves the vast $64 billion valuation while ignoring the potential for social network to face the typical demise.

The SocialBakers data should be worth following as it suggests the network peaked in October. The desire for the company to finally monetize the massive network of users is only likely to push the average user away from the service. Do you really want that creepy friend from high school searching all of your likes or photos?

It doesn’t appear that Google or Yelp have anything to fear. Google will remain the place to search for actual business related functions. Likewise, Yelp collects data from users that voluntarily share in hopes of helping the community as a whole. Not to mention, the vast majority of Facebook users have a limited set of friends to even search for data. What are the odds a user even has a friend they respect that have an opinion on a particular location for a restaurant? And how would Facebook ever monetize your friends opinion?

In the end, Facebook will never be able to monetize users that don’t exist in the future. A future that must be bright to justify a $64 billion valuation.


Mark Holder and Stone Fox Capital Advisors, LLC have no position in any stocks mentioned. 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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