I expect $Meta Platforms(META.US) to continue to underperform the S&P 500 near-term as the outcome of a $1 trillion trial in Northern CA overhangs the stock. Like tobacco litigation 30 years ago, $Meta Platforms(META.US) is being sued by California and a multi-state coalition of attorneys general who have argued that $Meta Platforms(META.US) designed Facebook and Instagram to be addictive to children and teens, improperly collected their data, and misled the public about the platforms' safety. The trial in federal court in Oakland before U.S. Judge Yvonne Gonzalez Rogers who was appointed by Barack Obama is likely to overhang the stock until the advisory jury renders a verdict in October. The advisory jury is hearing the evidence and issues a verdict; the judge is the ultimate decision-maker on liability, penalties, and remedies. On appeal, the case would go to the Ninth Circuit Court of Appeals, which is widely viewed as one of the more liberal circuits in the U.S. federal court system.
In the spring, Meta (along with $Alphabet(GOOGL.US) ‘s YouTube) lost a landmark social media case in California, in which a jury found the companies liable for harming a young user with certain design features in their apps and awarded her $6 million. Then, earlier this month, $Meta Platforms(META.US) was ordered to pay more than $940 million in the state of New Mexico for being a public nuisance and causing psychological harm to children. In the current state AG case in Oakland the plaintiffs are asking for compensatory and punitive damages which could total $1.4 trillion, essentially equal to META’s market cap.While $Meta Platforms(META.US) remains cheap at 15.6x 2026 Adj EPS vs +15% long-term EPS growth, the potential for a trillion dollar initial judgment and an unfavorable appellate process before the liberal Ninth Circuit Court of Appeals could overhang the stock just like tobacco litigation impacted tobacco stocks for years until investors realized the tobacco companies could price future ligation costs into each pack of cigarettes and addicted smokers would pay it. Unlike tobacco stocks there is no pricing mechanism that $Meta Platforms(META.US) can use to offset the risk of litigation. $Meta Platforms(META.US) could settle this case for a few hundred billion dollars and the stock could rise but other litigation will surely follow.C
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