What Facebook’s Graph Search Means For Investors

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

For the past year, internet companies have been making central changes in the way they do things. All these changes are happening against the backdrop of an increased need for a personalized web - a living web, if you may. Facebook (NASDAQ: FB) is now the latest player to follow through on integral changes through its new graph search.

What is graph search and what does it mean for investors?

Graph search is a new search model that will replace the old search bar. Unlike traditional search, which uses keywords, graph search will use phrases to narrow in on friends, organizations and even brands based on users’ personal interests. Graph search is consistent with the need for a personalized web that not only provides information based on interests, but that anticipates user needs.

If graph search is a success, user engagement on Facebook will rise incredibly. Additionally, Facebook will have an easier time targeting ads. Unlike chasing individuals, targeting groups with overlapping interests will be much easier and effective from an ad perspective.

What does this mean for investors? Essentially, graph search means higher levels of user engagement, which in turn translates to more ad revenue and higher capital gains for investors.

But is the reality of graph search as flowery as the prospect?

Google+ huge threat

You heard right; that ‘ghost town’ that is Google+ is a huge threat for graph search. Facebook’s user base is, without question, far bigger than Google+. However, there is a catch. Google+ is entirely ad free for a reason. And further still, there is a greater reason why Google+ is nested under the idea of an all-inclusive Google account or an account that nests all of Google’s (NASDAQ: GOOG) services (mail, YouTube, Google+, mobile app store and more).

Unlike Facebook, Google+ has no ads. That’s ironic coming from Google, right? But there is a reason. Google wants to step up user experience so as to get the most accurate information from its users. Most Google+ users get into circles that directly satisfy their immediate interests. They also share articles and media that are consistent with their primary interests at the time.

For instance, if you were to go to the Google+ page of any investment lover, the bulk of articles and media you will come across will relate to investments, finance and economics. From this perspective, it is clearly evident that Google+ is more reliable than Facebook in terms of identifying users’ primary interests. On Facebook, close to half of the pages users ‘like’ represent persuasive marketing or at best, secondary interests.

Google+ allows Google to understand its users better and at a more personal level by highlighting users’ primary interests. And because of the whole ‘Google account’ idea, Google can use Google+ to profile its users and anticipate their needs. This will be a huge game changer as it is in every way consistent with the current push for a personalized web.

Don’t write off Yahoo!

While there is no denying that Yahoo!’s (NASDAQ: YHOO) business has gone south, there is still something bubbling beneath the surface. Earlier in the year, in an interview with Bloomberg’s Erik Schatzker at the World Economic Forum in Switzerland, Yahoo! CEO Marissa Mayer made heavy reference to what she described as ‘personalized mobile web.’ Yahoo! is working on delivering content based on interests to mobile users. This explains Yahoo!’s recent stance on acquisitions.

Why spend all those billions on acquisitions? It’s simple. Yahoo! has the content (financial quotes, celebrity news, sports, self improvement, politics and so much more), but can’t match this content to user interests. Because of users’ exodus to Facebook, Google and other niche social sites, Yahoo!’s user base, despite being voluminous, is not as robust as it used to be. It’s not sophisticated and Yahoo! can’t really use it to anticipate user needs and identify users’ primary interests.

The slew of acquisitions will help Yahoo! to rope in different kind of users who will engage at deeper levels with Yahoo! owned apps and services. This will allow Yahoo! to understand its users better and implement the whole personalized web concept that Mayer has been largely emphatic on.

A web based on interests is more likely to enhance user engagement and improve ad targeting. Advertisers may ultimately be able to present ads that provide a service to users rather than those that are merely based on content. This will translate into higher click-through-rates and more ad revenue for the internet player that manages to effectively follow through on personalized web.

As it is, Google still rakes in the lion’s share of ad revenue, particularly in mobile, which is the current central platform. Last year, it brought in more than $4.5 billion of the total $8.8 billion spent on mobile advertising. Facebook's $500 million paled in comparison. However, Facebook is expected to bring in $2 billion this year in view of increased mobile monetization.

Conclusion

Facebook’s graph search is definitely a step in the right direction. If Facebook’s graph search is a success, the social giant will be in for a huge payday from ads. However, it’s still too early to tell and investors should hold back and see how things go. If graph search shows signs of future success, buy into Facebook before the price starts trending upward uncontrollably.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


Lennox Yieke has 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!

blog comments powered by Disqus