Our Plan for Meta Shares Amid Litigation Overhangs

Mark Zuckerberg

We probably don’t need to tell you this, but shares of Meta (META) have been some of the hardest hit this week. Their near 8% drop yesterday was triggered by back-to-back legal setbacks, including a California jury finding Meta liable for addictive social media features. Headlines of a “Big Tobacco moment" that could open a flood of potential litigation, questions over possible structural impacts, as well as financial ones in an already nervous market, dropped the shares.

In our comments yesterday morning, we noted Meta has already introduced Teen Accounts, which include private settings, content, and parental restrictions, but we could see potential changes to those accounts, a move that could have some impact on advertising revenue expectations. Data from Khoros finds that ~4.6% of global Facebook users are teens aged 13-17, but the level of teen engagement has been falling as that cohort uses other platforms like TikTok, and Facebook’s Instagram. Other data from the Pew Research Center find that only about 3% of U.S teens say they use Facebook “constantly.” And for those wondering, Facebook officially restricts usage to ages 13 and older.

The verdicts against Meta focused on the platform’s design, not the content itself. Several lower courts have ruled that companies’ platform design choices are not protected by the law, but so far, no appellate court has weighed in. As we understand it, appellate courts, not trial judges, are the ones whose rulings bind other courts.

Meta as well as Alphabet (GOOGL) intend to appeal the rulings of these cases, which will first be heard by appeals courts at the state level. TD Cowen policy analyst Paul Gallant says the "linchpin case" is 30 state attorneys general versus Meta, which goes to trial in August. Cowen believes the companies' best hope may be getting the San Francisco case dismissed or getting Congress to limit their lawsuit exposure in exchange for new regulations.

Pulling the lens back a bit, Thursday's 8% decline in META and an additional drop Friday, when added to the larger fall dating back to the late-January peak, tallies to more than 28%. More than just a correction in the stock price, this move, as we can see in the chart below, has landed META shares in an oversold condition. And with an RSI near 23, it’s a pretty deep one.

We have seen overhangs like this before with GOOGL and even further back with Microsoft (MSFT) , and much like then, the current situation feels like an extreme overreaction, especially considering the potentially widespread implications of platform design. Thinking just about the internal AI initiatives inside Meta to drive its core advertising business and streamline its operations, we’re more than inclined to remain long-term shareholders.

Still, we don’t invest on “feelings” and that means watching for the next potential development. If we get a market bounce, we are likely to see META shares move with the market, but for a sustained move higher like the one Mark Zuckerberg is targeting with his arguably aggressive executive pay incentives, we’ll want more clarity before making any next buys with META.

At the time of publication, TheStreet Pro Portfolio was long META and GOOGL.