The growth machine at Facebook (FB) pulled off another impressive performance this year — and of course, investors have rewarded FB stock, which is up about 35%.
Going forward, the company will have a tougher time finding new sources of growth. Yet Mark Zuckerberg is not sitting back.
If anything, it looks like he wants to make Facebook in India a powerhouse.
Zuckerberg recently set forth his vision in an opinion piece for Times of India. Interestingly enough, he’s taken a fairly blunt approach, starting out with this subheading: “To connect a billion people, India must choose facts over fiction.”
As should be no surprise, Zuckerberg thinks the solution involves his massive effort called Free Basics, which allows for free Internet access.
Zuckerberg waxes almost poetic, with sweeping statements like: “In every society, there are certain basic services that are so important for people’s wellbeing that we expect everyone to be able to access them freely.”
But this should be music to the ears of investors in Facebook stock. No doubt, India represents a massive opportunity for the long haul.
But There Are Issues With the FB Plan
Zuckerberg’s approach has certainly ginned up lots of concern. Why? Well, the main issue is “net neutrality.”
For the most part, Free Basics will provide service to only a limited number of sites and services. Oh, and with FB being the gatekeeper, it’s a good bet that its own offerings will be on the slate – at the expense of rivals.
India’s Telecom Regulatory Authority is investigating the matter and will make a final determination within a couple weeks. In other words, there could be some uncertaintity for FB stock if there is an adverse decision.
Still, the company has some advantages. First of all, FB has been engaged in a vigorous ad campaign in India. And let’s face it, there will probably be millions of people who would love to get free Internet service, right?
Besides, there is an important distinction regarding the matter of net neutrality: the FB service is free, and there is no requirement that people have to use it. According to Zuckerberg: “We have collections of free basic books. They’re called libraries. They don’t contain every book, but they still provide a world of good.”
But there is something else that is important to keep in mind: India’s Internet penetration rate is only 18%. That is, there are essentially 1 billion people offline in that country. The penetration rate is actually lower than other countries like Algeria, Ghana and Honduras!
So if India really wants to be a world economic power, there is little choice but to get aggressive with Internet access — and the FB plan is certainly a cost-effective way to do this.
Bottom Line for Facebook Stock
Now, if the company does get a favorable ruling from regulators, this does not mean that the cash registers will start to ring up, providing a boost for FB stock. The fact is that Free Basics does not even provide any ad revenues, so do not expect any meaningful impact on Facebook stock.
As I’ve noted before on InvestorPlace.com, there should be caution anyway. The valuation on Facebook stock is already at hefty levels, with the forward price-to-earnings ratio at 37X. By comparison, Apple (AAPL) is at 10X and Alphabet (GOOG, GOOGL) trades 22X.
Also, there are some landmines that could knock Facebook stock awry, such as a potential lackluster launch of Oculus Rift or the adverse impact of ad spending from the decelerating global economy.
However, the plans of Facebook in India are encouraging for the long term. To keep up the user growth, the company will need to be a factor in building the necessary infrastructure for Internet access.
And the good news is that, with Free Basics, millions of people will get exposure to the key resources from FB.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
