CEO Mark Zuckerberg revealed Graph Search Tuesday. It's currently available to only a small number of Facebook users. It lets them search their friend lists for people who, for instance, live in a particular city or like a particular movie.
There are no ads right now with the service, but Facebook may soon begin placing them there, analysts believe, since the searches provide an opportunity to catch users when they're looking for somewhere to spend money. Today, Facebook uses mostly "display" ads, keyed to the viewer's interests but not their searches.
"We believe this could be Facebook's next billion dollar opportunity, greatly expanding the company's addressable market," said Youssef Squali at Cantor Fitzgerald. "This service will leverage the incredible amount of unstructured social data the company has to extract answers to questions about people, photos, places, and interests."
"That said, we do not see this as a major threat to Google, at least not in its current form," Squali said.
Brian Pitz and Brian Fitzgerald at Jefferies & Co. believe it will take time for Facebook to start making money from Graph Search.
"We would expect Facebook to focus on nailing the user experience before getting aggressive about monetization," they wrote.
Over time, Graph Search could become important for local recommendations and dating, challenging businesses like Yelp and Match.com, the Jefferies analysts wrote.
Investors felt the same Tuesday, sending shares of Yelp Inc. tumbling more than 6 percent. Shares fell another 3 percent Wednesday.
Sterne Agee analyst Arvind Bhatia said the search feature could help drive users to use Facebook for web searches as well, as feature that's provided by Microsoft Corp. Facebook gets a share of the revenue from those searches, which could present a revenue opportunity that's just as big as the one from direct sales of Facebook search ads, he said.
Facebook shares fell 7 cents to $30.03 in Wednesday morning trading after falling 85 cents Tuesday.