Is Facebook's Search Function A Game Changer?

Disclosure: I am long FB. (More...)

If you are one of the many investors sorely disappointed by Facebook's (FB) less than a stellar IPO, you are not alone. You also need to hear some important words - Facebook's IPO and current stock price have very little, if anything, to do with the company's importance in the world, or in its ability to provide investors with long-term returns. This is definitely a case where you have to have a much bigger picture in mind when it comes to your investment dollars.

Facebook Is Huge, Even If Its Stock Price Isn't

Facebook boasts more than a billion users. That's a full one-seventh of the world's population, making it essentially the third larges country in the world behind China and India. In terms of big data, what Facebook knows about its users is nothing short of mind-boggling. That big data is utilized in the company's approach to ads in its user-driven model. That's why Facebook's quarterly revenues have been steadily increasing since 2011, when revenues were at $731 million. In January, revenues hit a record $1.585 billion. Talk about staggering. But to keep this amazing momentum going, even Facebook has to innovate, and its latest innovation is all about search.

Facebook's Graph Search

Everyone agrees that Facebook's original search function was largely useless. About the only thing you could do with it was quickly navigate to a friend's page. But if you wanted to search out content from non-friends, or find specific content, you were pretty much out of luck. All that's going to change as Facebook continues to develop, test and roll out its new search capabilities, which could have an enormous impact on its ability to continue to grow its revenues. The key is that it makes use of natural language processing, a method that can recognize slang, misspellings, nicknames for places, and all sorts of other unique ways people have of expressing things that they type into a search box. It figures out how those things relate to terms that really exist in the database and matches them up for search results that can be uncannily accurate. Right now Graph Search is still being tested with a small portion of Facebook's users, but even that small portion numbers is in the millions.

Up and Running, But Not Perfect

While early indications are that Facebook's Graph Search really could be a game-changer, there are lots of things that the engineers still need to iron out, the biggest of which is figuring out how to make it work for languages besides just English. It's one thing for the tool to be able to figure out various idiosyncrasies in English, and an entirely different and more difficult thing to do it languages like Russian and others that depend heavily on inflection and other language-specific factors. The key for Facebook is going to be a continuous and rigorous improvement process.

The Potential Gold Mine

If Facebook's new search function delivers on its potential, then search ads could see the influx of literally hundreds of millions more advertising dollars. It is also worth noting that more than 15 million businesses have Facebook pages. With a robust search function, the potential for monetizing through sponsored stories is phenomenal. One of the reasons this could all work so well is because of the tried-and-true maxim that people trust the content and opinions of trusted friends more than anything else. Graph Search will make the most relevant results those that come through a user's own social filters and networks.

Not Getting Ahead of Itself

It would be easy to get caught up in the long-term monetization potential of something like Graph Search, but Facebook is playing it smart on that account, keeping its focus on functionality and improving the user experience. Rather than jumping ahead and seeing dollar signs, Facebook is going to take its time to make sure it gets this one right. No one expects the new search function to have any financial impact at all in the short term, but if it does get it right, then the long-term revenue potential could dwarf anything the world has seen to date. Only then might it pose any kind of threat to the big search players - Google (GOOG), which has cornered more than 66.5% of the global search market, trailed by Microsoft's (MSFT) Bing at 17.3% and Yahoo! (YHOO) at 12%. And just in case Facebook's new search function doesn't deliver as much as users want, it has partnered with Microsoft's Bing to enhance outside search results. That's a very smart move at this early stage of Graph Search development.

The Bottom Line

Facebook is growing at an enviable rate and therefore is here to stay. Investors would do well to buy in while its stock prices are low. Then it's just a matter of waiting to see how Graph Search plays out in the coming years.

By unbigoted research Source:www.seekingalpha.com