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Facebook (FB) surprised investors on Tuesday, January 15th, 2013, by announcing a sudden press conference. In it they unveiled the new "Graph Search", a new search function for Facebook that will allow the user to utilize the troves of information possessed by Facebook. Facebook is taking the search function in a direction different from that of Google (GOOG). It's banking on the expansion of social media in people's lives, and allowing them to search for "Friends who like tennis and live in new York City" provides a capability that Google cannot fill.

Yelp, Inc (YELP) fell 6.19% on the day of the announcement, on triple normal trading volume. A company like Yelp, Inc represents a blend of the two dual goals of Facebook and Google. It helps the user find things to do and places to go (like a Google search would), while also making it more social but including reviews by your peers (like comments or likes on a business Facebook page would do). Facebook's Graph Search will be taking market share from companies like Yelp, Inc, rather than Google, which is going for a different experience then Facebook.

While Google aims to take over the internet user's experience by providing the best quality of tools (Gmail for email, Google Docs for file management, Google as a search engine) and integrating them, Facebook utilizes a different approach. Facebook appeals to the social side of people, and it is this realm that Facebook aims to dominate. Mark Zuckerberg realizes that Google will continue dominating the realms of email, search engines, and smartphones. He also realizes that for every month that Facebook keeps its spot as top dog of social networking, the more likely it will stay that way. Google+ has not been able to put a dent in the number of active Facebook users, and it seems likely to stay that way.

With this in mind, Mark Zuckerberg's announcement of the Graph Search is a step in the right direction. Investors may have anticipated bigger news, which is why the share price dropped 2.74% on the day of the announcement. I think that this drop is an overreaction to a small but positive step in the right direction. Graph Search will further entrench Facebook as an essential part of everyone's lives, exactly where Zuckerberg wants it.

Valuation

After a 2.7% drop in share price, investors looking for an entry point are provided with a solid opportunity. As soon as investors realize the value of a feature like Graph Search, the share price will likely appreciate.

Company Management

Mark Zuckerberg is realistic about the direction that Facebook must take looking forward, and the announcement of Graph Search is a step in the right direction for Facebook.

Variant View

Google+ could start to gain market share, which would reduce the value of a feature like Graph Search and hurt the earnings potential of Facebook.

Source: Facebook's Drop Following 'Graph Search' Announcement An Overreaction