The Threat That Wasn't

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

Many people know that Facebook (NASDAQ: FB) recently announced that they would expand the company's search capabilities. The company will now allow searches for things like, “restaurants in Baltimore visited by my friends.”

On this news, investors immediately started to question what effect this would have on companies like Google (NASDAQ: GOOG), Yahoo, Microsoft (NASDAQ: MSFT), and even sites like Yelp (NYSE: YELP). In fact, Yelp fell about 7% on the news.

This new feature doesn't change much, and investors need to understand what Facebook is actually doing to get why Google shouldn't exactly be shaking in fear.

In the Wall Street Journal article I read, the comment was made that “the distinctions between Google for search and Facebook for gossip and photos are increasingly blurring.” With due respect to the Journal, there is nothing blurry about what people use these two sites for.

The same article said that "people still think of Google for search and Facebook for connecting to friends and family". I would take it a step further and suggest that some web sites have already established a virtual identity and that won't change because of a new feature.

You can think of the web today like a big high school. Identities have already been established and cliques have been formed. Facebook trying to become a de-facto search engine is sort of like the class nerd trying to become the star of the football team.

For instance, if you ask the average person what web site they go to for search, the majority are likely to respond with Google. Microsoft and Yahoo have teamed up to offer search results through the Bing engine, but the combination's market share has stayed virtually flat. Yelp offers reviews of local businesses. If you ask users for the two most popular online shopping destinations, there is a very good chance that either or eBay will be their answer. These companies have established their niche, and going outside of their comfort zone is a difficult challenge.

There are several problems that I believe will make Facebook search much less useful than traditional search results. First, the search results will only be in the context of what users can already look up. In theory, if you aren't friends with a person, all of their information is locked away. This is a key difference between results found on popular search engines or even Yelp. Search engines and Yelp don't rely on you having a connection to a certain company, restaurant, item, or service. The other key difference between Facebook and popular search engines is their integration into browsers.

Just because Facebook will allow improved searches from the Facebook site doesn't mean customers will go there first. In fact, most browsers have search built into the address bar. If users want to search for something, they can just type their request into the address bar and hit return. Until Facebook is an option as a default search engine, many search queries will be out of reach. Another way this feature is being limited is the lack of support on mobile devices.

With millions of iOS and Android devices being activated every month, the idea of launching a search tool without mobile support is almost laughable. Since Google dominates mobile search, the company has nothing to worry about in this field unless Facebook adds mobile search support. The bottom line is, this new feature of Facebook's is hardly a category killer.

As an investor, what does this new feature mean? Honestly, it adds a small amount of potential incremental revenue to Facebook and that's about it. The investing thesis doesn't change for each of these companies because of this new feature. Facebook currently sells for just under 45 times forward estimates, and is expected to grow by 29.14% in the next few years. While this isn't exactly cheap, the numbers are more favorable than they once were.

Google sells for just over 16 times earnings, yet is expected to grow EPS by about 14%. The company recently reported strong earnings, and this Facebook announcement does little to change the investing thesis. Microsoft powers Yahoo!'s search results, and offers investors a nice combination of yield (3.3%) and growth (8.5%). The stock is relatively cheap at about 9.5 times projected earnings as well.

Yelp could be under the most scrutiny, due to this added feature on the world's largest social networking site. Yelp's biggest problem today isn't Facebook; it's the stock's ridiculously high multiple of over 1,000 based on estimates. I've written about Yelp in the past, and their local advertising market opportunity is very large, as 85% of local advertising money is spent offline. However, analysts are only calling for about 18% EPS growth, and investors seem to be ignoring this fact.

In the end, this new search feature is a nice addition to the Facebook site, but is hardly a game changer. The company would have to allow searches from outside a user's circle of friends to have a chance to compete with a search engine. Since this would cause an uproar over privacy concerns, that's unlikely to happen.

Don't make the mistake of buying the shares because they are in the search market. Facebook's search is nothing like Google or others, and the company needs to stick to what they know. Facebook is for connecting to people, Google is for search. The lines have already been drawn and there is nothing about this announcement that makes things blurry at all.

MHenage has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Google and Microsoft. 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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