As a kid, Kaley found it increasingly hard to concentrate on school...
All she wanted to do was scroll through social media. She first started using YouTube at age 6. And she started using Instagram when she was 11 years old.
Kaley was hooked on social media. And she said it caused her to develop anxiety and depression.
Unfortunately, plenty of other young folks can probably relate to Kaley's experience. But her plight specifically is significant for tech giants Meta Platforms (META) and Google parent Alphabet (GOOGL)...
You see, jurors in a California court recently heard Kaley's story as part of a social media addiction trial. And on Wednesday, they found both Meta and Google liable for causing young Kaley's mental health issues.
Meta and Google own Instagram and YouTube, respectively. And the jurors in the trial said Kaley should receive $6 million from the two companies. Meta will pay 70% of that total.
This verdict came only a day after a similar one in New Mexico...
There, a jury ordered Meta to pay $375 million for failing to protect young users from predators on its apps.
Now, both those amounts are a tiny fraction of Meta's total revenue. Last year, the company hauled in more than $200 billion in sales.
In October, I shared that Meta made 98% of its revenue from advertising. Of course, some of this money came from advertising to young adults.
And Meta knows the power of getting young folks in general on its platforms....
In the California trial, Kaley's lawyers showed the jury internal documents from the company. In them, Meta CEO Mark Zuckerberg and other executives discussed young folks using the company's apps. As one internal document stated...
If we wanna win big with teens, we must bring them in as tweens.
As I said, the money spent to settle these cases is trivial to Meta. But when it comes to the company's stock, the cases matter...
Investors Punish Meta's Stock After the Courtroom Loss
You see, these two cases are only the start of Meta's legal troubles. In fact, a legal climate like this could spell trouble for the whole social media industry.
There are about 2,000 pending lawsuits from parents and school districts across the country. They accuse tech companies of getting a generation of young people addicted to their social media feeds.
And now, Kaley's bellwether trial shows that there's a chance these lawsuits could move forward.
Naturally, the fear of more lawsuits sent shock waves through Meta's stock. On Thursday – the day after the verdict in California – META shares collapsed by about 8%.
Alphabet's stock also dropped on Thursday – but not as much as Meta's did. It fell by more than 3%.
Meta's big fall last week also came amid a tough period for the stock...
Leading up to last Wednesday's verdict, META shares were already down more than 20% over the previous six months.
Meta's relative strength versus the S&P 500 Index has also been negative in recent months. That's even with spikes in support for the stock from the "smart money" on Wall Street.
In the meantime, the stock has been stuck almost entirely in "neutral" territory in the Power Gauge for the past six months.
You can see what I mean in the chart below...
Today, Meta still gets a "neutral" rating from our system.
But even if the social media industry faces an influx of lawsuits, Meta is unlikely to disappear entirely...
In fact, my colleague Vic Lederman once compared Meta to the cigarette industry. He noted that as Americans smoked fewer cigarettes, cigarette companies shifted to other products.
Of course, Americans didn't stop using nicotine...
Products like "electronic cigarettes," or "vapes," filled American's demand for the addictive chemical. And they kept companies like Philip Morris (PM) alive.
And something similar could happen with Meta and the social media industry...
Tech Giants Could Be Today's Cigarette Companies
You see, Meta expects to shell out up to $135 billion in capital expenditures this year. And it's no surprise that most of that spending will be going to AI.
In fact, the company has set its sights on creating a “superintelligent AI" technology.
Now, Meta hasn't exactly outlined what that looks like. But I wouldn't be surprised to see the company push further into stand-alone AI platforms – especially if it starts losing more lawsuits.
Just like Philip Morris adapted in the cigarette industry, Meta could adapt in the tech industry with its big push for more powerful AI.
We already got a taste of that with Facebook Vibes. Meta also includes its AI models in wearable tech, like eyeglasses or rings.
Like with cigarettes, many Americans won't want to break the addictions to their social media feeds anytime soon. And we don't know how Meta's legal troubles could ultimately play out. I'm doing some speculating on the company's future, of course.
But for now, the Power Gauge sends us a clear message...
There are better places in the market to grow our money today than Meta.
Good investing,
Ethan Goldman
