Meta Platforms Inc. is confronting a significant legal challenge as a bipartisan coalition of states sues the company for allegedly deceiving the public and designing Facebook and Instagram to encourage compulsive use among young individuals. The company itself has stated that a loss in this trial could lead to penalties as high as $1.4 trillion, a figure comparable to its entire market capitalization. This legal risk adds to the existing pressures on Meta's stock, which has already been under scrutiny due to its substantial investments in artificial intelligence.
Neville Javeri, a portfolio manager at Allspring Global Investments, acknowledged the difficulty in assessing the probability of such a large penalty but emphasized the necessity of considering it as a potential liability, especially since Meta itself has cited these significant figures. Investors are concerned that a verdict forcing changes in Meta's business practices could reset its growth trajectory to a considerably lower level, potentially leading them to seek alternative investments. This trial is being viewed by some as a potential "tobacco moment" for social media, drawing parallels to the landmark legal battles that led to stricter regulation of the cigarette industry decades ago.
The trial's commencement saw Meta's shares fall 4.5% on Tuesday, following a 3.5% drop on Monday. Despite a modest rebound on Wednesday, the stock remains down 17% for the year, making it one of the worst performers in the Nasdaq 100 Index. Concerns about the company's legal exposure have been growing, with recent cases in New Mexico and Los Angeles finding Meta liable in child safety and social-media addiction related trials. Additionally, governments in Australia and Europe have taken steps to ban children from using social media to protect them from exploitation. Meta, however, maintains that the state attorneys' claims are unsubstantiated and their financial demands disproportionate, asserting its record of creating strong protections for teens.
Beyond the potential financial penalties, the trial also poses a risk of mandated backend changes to Meta's social media products, such as eliminating features like infinite scroll or altering algorithms. These changes are crucial to how social media platforms operate and could significantly impact Meta's core advertising business. While Meta's shares are considered relatively inexpensive, trading at less than 15 times estimated earnings, the legal challenges combined with concerns about its AI spending are making some analysts, like Paul Meeks of Freedom Capital Markets, advise caution and waiting on the sidelines for investors. However, others, like Stephen Lee of Logan Capital Management, see the current valuation as an opportunity, especially given the company's expected earnings per share growth of 35% in 2026.
New Mexico Attorney General Raúl Torrez highlighted the potentially "astronomical" consequences, pointing out that a recent New Mexico jury ordered Meta to pay $567 million into an abatement fund and an additional $375 million for violating unfair practices. He argued that if such rulings were scaled to larger states like California or New York, the judgments could be massive and market-shifting, suggesting that Wall Street may be underestimating the significance of a potential loss in California by focusing too much on Meta's AI capital expenditures rather than the possible deterioration of its ad business due to these lawsuits.
