Facebook announced a search engine this week called Graph Search. Many in the media and Twitter have focused on the competitive position of the new product against Google. No doubt, when people hear “internet search” they think of the companies’ with the largest market share – Google and Bing. The finance community investing in the companies saw it differently, though.
Even if markets are not perfectly efficient, they do generally bake in news related to future earnings of a company into stock prices rather quickly. For example, search Dell’s stock price on the day of the rumors it would go private. There is a huge leap in the price. Looking at the graph of Google’s stock price (blue line) the day Facebook search was announced does not reflect lower future earnings expectations. It is flat-line, as if no news came in.
Markets may think Facebook’s search will bomb as an alternative to Google, but other services may be deeply impacted. For example, look at Yelp’s price during the announcement in the afternoon (green line). Now that is what the impact of a major new competitor in a company’s market can look like. Often tech and finance don’t interact much, but here is a good example where the information from the equity markets can actually help tech industry sharpen their analysis. Rebecca Rosen in The Atlantic points to Yelp, LinkedIn, and OKCupid in the title of her analysis of the Facebook announcement.
I’m not sure if 5,000 Facebook friends (which was the maximum number of “friends” last time I checked) would ever suggest the same New York City restaurant more than twice, but this the kind of value that Yelp clearly delivers. Granted, “pictures of my cousin’s baby” has potential with ads for infant clothes, etc. but that is not something that people use Yelp for. That is why I do analysis and show deference to markets for predictions!
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