Year-to-date all Mag 7 stocks have underperformed SPX. $Meta Platforms(META.US) and $Alphabet(GOOGL.US) which had been holding up well all year, have underperformed in recent weeks as investors struggle with a California jury verdict finding the companies negligent for a 20-year-old woman's mental health problems, awarding her $6 million in damages for her excessive use of their platforms as a child. The verdict found the companies negligent, stating that the design and operation of their platforms made them addictive and that they either knew or should have known their products posed a danger to children.
The case has far-reaching implications, with thousands of similar cases in the pipeline and governments around the world considering measures to protect young social media users, including bans, restrictions on design features, and laws requiring platforms to protect children from harmful content. This conjures up memories of adverse tobacco verdicts in the 1990s where juries started finding tobacco companies liable for smokers’ addictions and health injuries, despite warning labels on cigarette packages disclosing tobacco’s risks since the 1960s. Where is this headed? IMO, the $6M jury verdict will get overturned on appeal (this trial was in CA state court where judges’ biases often lead to errors that get overturned at the appellate level). There is no question that the plaintiff in the case had a traumatic childhood, but there was a real dispute about whether social media was the principal cause of that trauma. Here the plaintiff testified that her mother had abused her physically and psychologically as a child. One issue may be that the judge instructed the jury to consider whether the companies’ negligence was ‘a substantial factor’ in causing the harm — not the primary factor but a substantial factor. Beyond this specific verdict, we may be headed for an outcome where $Meta Platforms(META.US) and $Alphabet - C(GOOG.US) place a minimum age on using their platforms that requires uploading government-issued identification. The impact on children is what juries tend to find most objectionable, and that’s an easy fix. At META’s forward P/E of 16x and GOOG’s forward P/E of 22x vs 10-15% forward 5-year Rev and EPS growth, both stocks seem very cheap.
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