Meta Platforms Agreed to Pay Up to $18 Billion and Set Some Limits for Younger Users. Is the Stock a Buy?

Facebook's parent company, Meta Platforms (NASDAQ: META), reached an $18 billion settlement last month with 52 attorneys general across U.S. states, territories, and the District of Columbia to settle claims related to teen social media use and its impact on mental health.

The lawsuit was a nightmare from a public relations standpoint, but the details of the settlement suggest it won't have much direct effect on Meta Platforms' business. The settlement, which Meta says includes $12.7 billion in payments over 10 years to the plaintiffs and $5.3 billion if YouTube and TikTok meet certain conditions, effectively becomes a manageable expense for the company that will do little to disrupt the core business model.

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The end of a major legal case

The settlement of up to $18 billion ended up being a pretty good deal for Meta Platforms. The plaintiffs originally sought $200 billion, with Meta lawyers citing up to $1.4 trillion in potential damages. This highest figure almost matches Meta Platforms' market cap, and it would have taken the company multiple years of profits to pay it off.

The changes Meta Platforms agreed to make to its social networks as part of the settlement also feel minimal. The changes include Facebook and Instagram adopting a combined two-hour daily time limit for users under 18, with prompts to try to stop uninterrupted scrolling. The company says a teen can turn these off with a parent's permission. "Night mode" will restrict access to feeds from midnight to 6 a.m for those under 18.

These time limits and night mode remain in effect for five years. Meta said that if social media competitors Snapchat, TikTok, and YouTube adopt comparable terms, the daily limit on each platform will drop to 60 minutes for 10 years, and it will add three hours to night mode.

A Gallup study from 2023 found that the average teen spent 0.9 hours per day on Instagram and 0.3 hours per day on Facebook. That comes to 1.2 hours per day, which is below the two-hour cap.

For those seeking a meaningful solution to teen social media addiction, the settlement likely will not have a lasting effect. And while Meta Platforms has taken some knocks over this, the company has weathered similar controversies in the past. Meta Platforms manages to keep growing, regardless of its public perception.

The company's financials remain solid

Most of the numbers that investors care about are still trending in the right direction. Revenue increased by 28% year over year in the second quarter, while Meta Platforms' daily active users jumped by 3% year over year. The company also continues to boost its average revenue per user.

Investors did show concern over a 14% year-over-year drop in net income in its most recent quarter. However, a forward price-to-earnings ratio of 18 makes up for it. The stock trades at a lower valuation than the S&P 500, even though Meta Platforms tends to deliver stronger fundamental results than the typical S&P 500 company.

Meta Platforms is diversifying its business

Rising capital expenditures are what hit net income, and they are tied to large investments in artificial intelligence. These investments should help diversify the company's revenue streams so it relies less on advertising. Right now, online ads account for nearly 98% of its total revenue.

CEO Mark Zuckerberg said in the company's Q2 press release that AI is "powering our next generation of products and opening the door to entirely new enterprise opportunities." "Superintelligence" and AI glasses are some of the new products being developed.

Unsurprisingly, there have been some bumps on the road. Meta Platforms' smart glasses are receiving backlash due to privacy concerns. Meta Platforms has worked to address the issue, and demand for smart glasses is gaining momentum. Meanwhile, Grand View Research projects a 24.2% compound annual growth rate for the smart glasses industry through 2033.

What becomes clear is that there is a pattern for Meta Platforms, and issues like the recent lawsuit and settlement tend to be forgotten over time, especially when judged by the company's quarterly results. Controversies and calls to boycott Facebook have come and gone multiple times over the past two decades, but Meta Platforms continues to win over consumers with its products and services.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.