The stream of new ideas coming from Facebook Inc (NASDAQ:FB) continues. The social media site continues to cement its dominance over rivals such as Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP). It also has been adept at attracting headlines in a variety of tech initiatives. However, despite the innovations, a ruling on net neutrality threatens the social media industry and FB stock.
At present, few analysts speak negatively about Facebook. One only has to look at recent articles about FB stock on InvestorPlace to see positive sentiments. “Not Running Out of Room to Grow,” “Big Growth at a Big Discount,” and “Stellar Earnings Visibility” are headlines one sees about Facebook stock.
Until recently, I agreed 100% with their sentiment, and I still agree in many respects. After all, it seems as if the company always comes up with innovations. FB platforms also tend to dominate specific tech sectors. Refrains that FB will “overtake YouTube” or “disable cyber attacks from North Korea” have added to the respect gained by FB stock.
What analysts rarely take into account is the end of net neutrality. Net neutrality forbade internet providers from charging extra for certain types of content. Sites such as InvestorPlace that require little bandwidth or a bandwidth-intensive site such as the one supported by Netflix, Inc. (NASDAQ:NFLX) received equal treatment.
The repeal of net neutrality changes that. Most users consume bandwidth primarily through video streaming or social media use. Repeal of net neutrality allows providers to charge “video streaming fees” or “social media fees.”
Consumers could now choose to lower internet costs by choosing a package that excluded access to FB’s site. Some consumers will choose not to pay more for social media, cutting into Facebook usage.
Providers also face costly upgrades to provide this bandwidth. Over the next few years, the industry will spend hundreds of billions of dollars to build 5G networks.
Having 5G service will provide internet speeds that are ten times faster than those provided by 4G.
However, the number of cells required promises to go up by more than tenfold. Under current 4G technology, providers only need to build and maintain one tower every few miles.
Under 5G, providers will need dozens of small cells simply to cover a neighborhood, hence the high cost.
With net neutrality in place, the cost of this upgrade falls evenly on all consumers. However, without net neutrality, providers will have more power to place the charges on the backs of the heaviest users. Those who watch videos and use social media will likely bear most of the cost.
To be sure, having ten times the speed will help FB stock in the long run by enabling apps not currently possible. However, paying for this network without net neutrality could cause near-term uncertainty for FB. Even if only 10% of customers decline to pay a social media fee, that could cost FB billions in lost ad revenue.
At 34 times earnings, Facebook carries a reasonable valuation compared to other high-growth companies such as Netflix or Amazon.com, Inc. (NASDAQ:AMZN). Still, stocks rarely increase in value when conditions call revenue growth into question.
While growth prospects for Facebook stock remain largely intact, the ruling on net neutrality could hurt growth. FB prides itself on not charging customers to use its site. However, because the repeal of net neutrality allows providers to charge extra for coverage of Facebook’s site, consumers could pay indirectly to use FB.
Further, the telecom industry’s need for a costly upgrade could fall heavily on FB users. This uncertainty could affect the stock in the near-term. However, Facebook’s long-term prospects for growth remain intact once the effects of net neutrality are better known.
Once consumers know these effects, investors should then consider a position in Facebook stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.