META Stock Faces Billions in Legal Risk After Historic Decisions

The legal system has recently sent shockwaves through the shares of the Magnificent Seven giant Meta Platforms NASDAQ: META. The company lost two lawsuits, one in New Mexico and one in California, which led to the shares taking significant hits.

For a company the size of Meta, about $400 million of the damages the company will pay is table stakes. However, markets are concerned about the long-term implications of these decisions.

Meta's legal issues are not something investors should brush aside. He may cause some serious damage. Perhaps more frightening is the negative sentiment that could weigh on Meta shares if the company continues to lose lawsuits. This comes as many market participants have become skeptical of the massive Artificial Intelligence (AI) CapEx spending by Big Tech companies.

“Bellwether” California Case Tanks Meta Stock

New Mexico has ordered Meta to pay $375 million in civil penalties, finding the company guilty of “misleading consumers about the safety of its platforms and endangering children.” Meanwhile, a California judge found Meta and Google's parent company Alphabet NASDAQ: GOOGL liable for $6 million in damages in a social media addiction lawsuit. Meta will bear 70% of the burden, resulting in a payment of $4.2 million.

Despite the large payout involved in the New Mexico case, markets apparently seem more concerned about the precedent set in California.

Notably, the day after the California decision, Meta shares fell nearly 8%. This compares to a nearly 2% decline seen after the New Mexico decision.

This is because experts consider the California case a “bellwether.” As NPR notes, “A jury must first find that social media apps should be considered flawed products designed to exploit the developing brains of children and teenagers.”

Billions in Fines and Fees Could Follow, Damaging Already Fragile Sentiments

Due to the novel nature of the case, it opens the door for the company to lose thousands of other similar cases. There are currently nearly 2,000 pending cases that rely on the same interpretation of the law as that used in California.

Theoretically, if Meta were to lose 2,000 cases and pay $4.2 million each, the company would accrue $8.4 billion in damages. That would be far from insignificant, equating to about 17% of the company's $46.1 billion in free cash flow generated by 2025. This does not include the large legal fees that Meta could accrue while defending itself or the possibility that other parties would bring additional lawsuits against the firm.

Meta expects to spend between $115 billion and $135 billion in capital expenditures by 2026 to support its AI goals. During this spending spree, which should put a lot of pressure on free cash flow, the last thing a company needs is to lose billions in lawsuits.

Ultimately, investors will have to wait and see if future cases will repeat the decision reached in California. However, if the company faces more legal losses, it can put more pressure on the stock's decline. However, Meta plans to appeal both decisions. If successful, this could provide protection against pending and potential lawsuits.

The biggest threat is that these cases could lead Congress to reconsider the immunity of Section 230. Section 230 has been the key for social media companies to avoid legal scrutiny based on the content posted on their platforms. State legislators, with support from both sides of the aisle, have proposed a bill to sunset this protection. Doing so could open Meta and Google to extremely high levels of legal exposure.

However, in relation to the California case, this proposition is not consistent. The legal theory applied was specifically designed to avoid Section 230's immunity, not directly challenge it.

Amid Turmoil, Morgan Stanley Names Meta Top Pick

MarketBeat tracked just one Wall Street analyst price update since the conditions were lifted. Brian Nowak at Morgan Stanley lowered his price target on Meta by 6% to $775, a move that coincided with the stock's decline.

Despite this, Nowak named Meta his “top pick,” saying sentiment around the stock has bottomed out. Notably, Meta shares have recovered significantly from recent lows near $525. Nowak's recommendations contributed to this. However, the expectation that the conflict in Iran could end soon has been a major driver, significantly increasing the overall market. Still, Nowak's target means a more than 30% upside for the stock.

Meta now trades at a forward earnings multiple of close to 22x, slightly below its three-year average of 23x. This comes despite the company predicting a 30% increase in the next quarter, which will mark its fastest growth rate in years.

Overall, a high level of uncertainty now surrounds Meta Platforms stock, making it very difficult to assess its outlook. The company will have a chance to ease investors' fears in its next earnings report, scheduled for the end of April. This release marks a critical point to reassess your future.

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