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Why Facebook Won't Challenge Google in Search

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Facebook is not planning to get into the search business, according to a top technology analyst who spoke with management at the social network.

“Based on discussions with management over the year, we believe Facebook has no intention of getting into the search business,” said Citigroup’s Mark Mahaney, the top-ranked technology analyst according to Institutional Investor magazine. “We also believe it has seen limited impact from the integration of social signals into overall search results, based on its integration with Bing to date.”

Microsoft’s Bing and Facebook enhanced their partnership about a year ago as the search engine began integrating the “likes” of one’s friends in an effort to get results based more on social connections.

“This could be a function of the limits of Bing’s Search engine (with disappointing Yahoo -Bing search experience also highlighting these limits) or it could be a function of the inherently limited role that social signals can play within search,” wrote Mahaney in the note to clients Sunday. “Either way, there’s less risk to Google here.”

Subsequently, the analyst upgraded Google shares to “buy” because of the diminished Facebook threat, as well as an expected flattening of operating expenses and a compelling valuation. Google is trading at a forward price-earnings ratio of 12, below the 25 percent and 22 percent EPS growth rates Mahaney is expecting in 2011 and 2012 for the company respectively.

Mahaney downgraded Google in April because of concerns about decreasing margins and the EU and Department of Justice's anti-trust investigations. His $680 price target implies a 21 percent return for the shares.

To be sure, the analyst still expects Facebook to be a formidable competitor for Google in the display advertising area. The biggest share of people’s time spent online is on their Facebook profile, creating a big opportunity for the still-private social network in display advertising.

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