Meta's capitalization collapsed by $119 billion in one day. Are its shares still suitable for investment?
Investors were spooked by the company's defeats in two courts at once about the harm of social media to young users
Photo: Desintegrator / Shutterstock.com
Shares of Meta, the parent company of Facebook, collapsed by 8% and closed trading below $548 for the first time in 11 months. As a result of the sell-off, Meta fell in price by about $119 billion and for the first time since 2023 dropped out of the top 7 most expensive U.S. companies by market capitalization, WSJ writes.
Why stocks collapsed
In two days, Meta lost in two landmark lawsuits about how social networks affect young users. On March 25, a court in Los Angeles ordered Meta and Google to pay $6 million to a 20-year-old plaintiff who claimed that Instagram and YouTube caused her addiction in her early years, which harmed her mental health. A day earlier, a court in New Mexico fined Meta $375 million, ruling that the owner of Facebook and Instagram had failed to protect young users from online threats, including sexualized content, and had in fact facilitated their exploitation.
Meta and Google plan to appeal the rulings.
Why it's important for investors
The sums that the courts ordered Meta to pay will not be a blow to the company - last year its revenue exceeded $200 billion. However, legal experts warn that the rulings could trigger massive litigation that could last for years, similar to legal campaigns against the tobacco industry in the 1990s, Forbes writes. According to Reuters, Meta and other social media owners are facing thousands of such lawsuits in California alone.
For a long time, federal law has protected online platforms from liability for user-generated content, but if precedent leads to an avalanche of lawsuits that social media is addictive, Meta may have to rethink the design of the platforms on which its advertising revenue depends, Reuters writes. Advertising accounted for about 98% of Meta's revenue last year.
"From a financial perspective, multiple verdicts could add up to billions of dollars in compensation and legal costs, especially if the courts find that the fault [for causing addiction] lies not only with user-generated content but also with the design of the social network," Mahoney Asset Management CEO Ken Mahoney told the agency.
"The rulings made right today will not disrupt the company's business model. But they do expand the range of possible scenarios for future cash flows and margins," said Adam Sarhan, CEO of 50 Park Investments. He attributed the stock sell-off to investors overestimating the level of risk to the company.
In a fourth-quarter report in January, Meta warned that litigation related to "young user issues" could "ultimately result in substantial losses."
Meta shares are now worth 30% less than they were in August, when their price hit $790. "Is Meta a bad investment today? Possibly, but in our opinion it's unlikely," Evercore ISI analyst Mark Mahaney wrote in a note quoted by MarketWatch. He believes investor panic is exaggerated.
"Unlike the tobacco industry, social media creates many positive social effects as a means of communication, entertainment, information and connecting people," the analyst added. He maintained a buy recommendation on the company's stock and a target price of $900.
This article was AI-translated and verified by a human editor
