Meta Plunges on Jury Verdict. Here's What It Means for Investors

Meta Platforms (NASDAQ: META) stock plunged on Thursday after a blockbuster verdict landed on the social media giant the day before.

A California jury found that Meta and Alphabet's YouTube had designed their products to be addictive, leading to mental health harm such as anxiety and depression to the plaintiff, and establishing for the first time that social media can cause personal injury.

That verdict comes on the heels of a similar setback for Meta in a case in New Mexico, where the Instagram parent was found liable for failing to protect its users from child predators. Meta will pay $375 million in that case and $4.2 million for the California verdict.

Those results are leading to chatter that social media is now having its big tobacco moment, meaning an addictive and unhealthy product is being recognized as such in court and forced to change the way it does business.

Image source: Getty Images.

What are the risks to Meta?

Of the two cases, the one in California about addiction is the real watershed. While the award is a nominal amount for a company like Meta, it could potentially open up the floodgates for similar lawsuits. Meta has more than 3 billion users around the world, and presumably, there are more than a few who could credibly blame the company for causing mental harm.

There's also an increased reputational risk to the company. Most of the downsides to social media are understood by now, and it's been established that they use tools that feed users dopamine hits, keeping them engaged, but the news could cause some to take a second look at their Facebook and Instagram usage, or lead to parents being more vigilant about teens using the apps.

Meta and Alphabet plan to appeal the ruling, and the tech giants will continue to push back on the notion that their products are causing harm or that they haven't taken adequate steps to address those concerns.

There's also the risk that Congress will revisit Section 230, a part of the Communications Decency Act that protects online platforms from liability for third-party content. That law has protected social media companies from such findings, at least until now.

No stranger to controversy

Meta's 8% sell-off on Thursday came on a day when the S&P 500 was down 1.7%, its worst day since the Iran war broke out, but at least some of the decline seems related to the verdict.

However, Meta has been under a spotlight for nearly all of its history, and it's managed to navigate it through its time as a publicly traded company. The best-known one of those was the Cambridge Analytica scandal, when user data was taken from Facebook profiles without user permission and used for politically targeted ads that may have swayed the 2016 election and the Brexit vote.

Meta also faced a widespread boycott from advertisers in 2020, called Stop Hate for Profit, in response to the murder of George Floyd, and the company has been fined billions of dollars for data privacy violations and faced an antitrust investigation over its acquisition of Instagram and WhatsApp.

In other words, Meta has delivered strong growth both as a business and as a stock, even with a dark shadow hovering over the business for much of that time.

After Thursday's plunge, the stock is down 17% year-to-date, even as the company posted strong results in its fourth quarter and just cut back on its metaverse project, which could save the company billions of dollars.

Meta stock is now down nearly a third from its peak last July, but the business looks as healthy as ever after posting 24% revenue growth in the fourth quarter.

While the legal situation deserves to be monitored, the stock looks like a buy on the recent discount.

Jeremy Bowman has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.