Social Media Stock Tracker: Facebook’s Graph Search Underwhelms, Drags Sector Down

The social media sector took a hit this week with an average weekly loss of 3% as FB’s announcement of a new graph search failed to excite investors, sending the stock down 7% (though it is still up 11% in the three weeks of trading of 2013). Despite the negative week, the average return for the social media sector in 2013 is a gain of 5%. EBAY announced solid Q4 results (see below) and next week we will see notable earnings from GOOG, NFLX, and most importantly, AAPL, which has cast a cloud over the entire Internet and media sector during the past six weeks.

WEEKLY STOCK PERFORMANCE
The social media sector took a hit this week with an average weekly loss of 3% as FB’s announcement of a new graph search failed to excite investors, sending the stock down 7% (though it is still up 11% in the three weeks of trading of 2013). Despite the negative week, the average return for the social media sector in 2013 is a gain of 5%. EBAY announced solid Q4 results (see below) and next week we will see notable earnings from GOOG, NFLX, and most importantly, AAPL, which has cast a cloud over the entire Internet and media sector during the past six weeks.
Speculation continued over another liquidity event for Alibaba, driving YHOO to a nice gain of 4%, but it was a bad week for YELP and Pandora investors, with losses of 8% and 4%, respectively. YELP was driven down by the thought that FB’s Graph Search is highly competitive (we do not agree in the near-term) and Pandora on the news that Sony/ATV negotiated an increase in royalties and that Amazon’s new mobile web store for MP3s increases the likelihood of AAPL launching a competitive streaming music service.
CHANGE

SINCE JAN 11

CHANGE

SINCE JAN 11

YHOO
MM
SINA
OPEN
LNKD
WEBM
BIDU
ANGI
3.8%
3.6%
1.2%
1.2%
0.9%

(0.9%)
(2.8%)
(3.0%)
JIVE
P
GOOG
ZNGA
FB
GRPN
YELP
RENN
(3.7%)
(4.2%)
(4.8%)
(5.4%)
(6.5%)
(7.5%)
(8.2%)
(9.7%)
COMMENTARY
Facebook
  • FB announced a new product, Graph Search, which will feature the ability to dynamically search content available through Facebook (people, photos, places and interests) for answers (rather than links as in typical search engines). Graph Search is not a mobile product at this time and full rollout will take years, according to Zuckerberg. The key differentiator is that Graph Search intends to answer queries based on how content has been organized on Facebook (liked, categorized, and grouped). MSFT’s Bing search engine will be a partner to FB by defaulting searches to Bing answers when Graph Search queries cannot be adequately addressed.
  • Despite the prior hype, last week we noted that the ‘mystery’ press event would be meaningless and with the stock down 7% this week, we reiterate that FB’s Graph Search should have zero positive impact on the stock in the near-term. It is difficult to project the long-term potential of Graph Search, but the U.S. paid desktop search market is currently $16.4b (MagnaGlobal) so if FB were able to find a way to monetize it in the future, even a slice of that market could be relevant.
  • Presently, we view Graph Search as a defense against decreasing user engagement, which we have previously highlighted as a potential problem for the company. Even if Graph Search is still nascent at the moment, search functionality increases the usefulness of the social network. In the medium-term future, we can be certain that FB will not miss the chance to find a way to increase ad inventory based on search results or boost sponsored search in a significant way.
  • In terms of effects on derivative stocks, despite YELP’s large decline in reaction to Graph Search, we continue to believe that the company is well placed and for now still rules local search and discovery. While GOOG is a natural competitor for Graph Search, the company has a 65.2% market share of worldwide search as of December 2012 (comScore) and it is not likely that users will substitute searches on FB for Google searches in a significant way in the near-term. Lastly, even though FB highlighted the potential benefits to hiring/recruiting with Graph Search, at this time it is not a credible competitive product to LNKD’s offerings.