What AT&T Stock Owners Should Take Away From Its Data Price Hike (T)

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In 2016, AT&T (T) wireless customers with unlimited data plans will have to pay $5 more per month to keep the service.

What AT&T Stock Owners Should Take Away From Its $5 Unlimited Data Price HikeIn reality, this news is insignificant, as it only affects customers who are grandfathered into a plan that dates back nearly 10 years. But buried beneath the headline is something very important for AT&T stock owners.

How Data Plans Have Changed

AT&T’s price hike on its unlimited plan only applies to customers who have had the plan for at least seven years. Back in 2008, $30 per month for unlimited data probably seemed expensive.

After all, smartphones consumed far less data on the much-slower 3G networks. Therefore, it was easy to rationalize paying $15 per month for 200MB when that’s all you needed. This was back when Netflix (NFLX) had less than 10 million total subscribers, and only 28% streamed more than 15 minutes of a particular show/movie per quarter.

Looking back, $30 per month, or even $35, would have been the deal of a lifetime, a great investment for subscribers who were willing to pay extra before 2009 and have since held on to the plan. Nowadays, AT&T subscribers pay $100 per month for 20GB of shared data. And if you stream a lot of video, that data goes quick.

What AT&T Stock’s Price Hike Illustrates

This all brings up a very important point for investors to keep in mind: Both data prices and data consumption have soared over the last seven years, a growth rate that is not slowing down anytime soon.

In other words, it may seem like wireless companies have been involved in a vicious price war over the last couple years, but AT&T’s unlimited data plan price hike perfectly illustrates just how fast prices have risen. Naturally, higher prices mean more revenue, which is better for AT&T stock.

With that said, the last seven years of data consumption growth was driven by faster networks and lifestyle changes. Companies like AT&T and Verizon (VZ) have invested tens of billions of dollars into their wireless network to make speeds faster and networks more reliable.

The effect of these investments were faster upload and download speeds on mobile devices. This allowed consumers to start doing more on their mobile devices, like watching shows, shopping, browsing the web, social media, etc. — all of which was pumping data consumption.

These things will continue to drive data consumption in the years ahead, but so will the Internet of Things, or IoT. During the next five years, the number of “things” connected to the Internet will surge 10-fold according to Goldman Sachs. Since these things are connected to the Internet, they will also consume data. According to Cisco (CSCO), the consumption of data will grow at a compound annualized rate of 57% year-over-year through 2019.

Connect the Dots Around T Stock

AT&T’s price hike illustrates just how much prices have risen in short time, and the price that subscribers will pay for data showcases how quickly data consumption has increased. If Cisco and Goldman Sachs are right, AT&T could see similar growth in both data consumption and prices over the next five years.

Of course, this bodes well for AT&T stock.

In retrospect, so long as AT&T does not cut data plan prices faster than data consumption rises, at 57% annually, it should continue to find growth in its wireless business. Over the last few years, AT&T has spent many billions to improve its wireless network and to prepare for this influx of data consumption.

Now that its 4G network is nationwide, capital expenditures are starting to fall, and free cash flow is starting to rise. After the second quarter of 2014, AT&T had capital expenditures of $23 billion in the prior four quarters, but that total is currently $18.3 billion over the last four quarters. Likewise, trailing 12-month free cash flow has soared from $10 billion in mid-2014 to more than $14 billion right now.

Collectively, T stock owners should feel really good about the prospects for AT&T stock. At less than 15 times free cash flow, AT&T stock is very cheap for a company that is expected to grow revenue 12% this year and 14% next year, with free cash flow growing, capital expenditures falling, and also new business opportunities emerging.

The bottom line is this: AT&T’s $5 price hike doesn’t mean much, but what it showcases is where AT&T stock and business is headed.

As of this writing, Brian Nichols owned shares of AT&T stock.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/att-stock-owners-t/.

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