Meta Platforms and Alphabet face courtroom losses – but I'm not worried; The metaverse debacle didn't matter in the long run; Q&A with a 'car dealer's worst nightmare'
1) In yesterday's e-mail, I discussed Meta Platforms' (META) loss in a New Mexico courtroom. Shortly after, news broke that the company, along with YouTube owner Alphabet (GOOGL), lost another lawsuit in Los Angeles...
According to this Wall Street Journal article, the companies were accused of designing their apps to be addictive and harmful to adolescents:
A jury found Instagram's owner Meta and YouTube negligent for operating a product that harmed kids and teens and failed to warn about those dangers. The decision dealt a blow to the companies that have historically been shielded by Section 230 of the Communications Decency Act.
The jury ordered the companies to pay $3 million to the plaintiff, named Kaley G.M., who testified that social-media use that started before she was a teenager had dominated her life for years and had contributed to mental health issues including anxiety, depression and body dysmorphia.
This is leading many to ask, as this WSJ column does, "Do back-to-back courtroom losses herald Meta's 'Big Tobacco' moment?"
The social media companies face two dangers: The first is that they could be forced "to make significant changes to the way they design and deliver their products," which could hurt their profits:
That is the view of some legal experts, but also the stated position of Meta itself, which argued heading into the trials in California and New Mexico that for juries to endorse the theory of the cases against them would challenge their ability to keep serving products used daily by billions of people.
The second risk is huge legal liabilities:
The judgments for the plaintiffs threaten to undermine long-held protections that have shielded internet companies for decades. They suggest future juries might be receptive to a product-liability argument against social media, which forms the basis of thousands of similar lawsuits waiting to be heard. And they encourage new plaintiffs to come forward, raising the prospect of mass litigation that could stretch for years and lead to settlements or changes in the industry, akin to the legal campaign against the tobacco industry in the 1990s.
These verdicts directly affect two of my three favorite big-cap tech stocks – the third being Amazon (AMZN), which isn't affected. So I'm following these developments closely.
I don't dismiss the risks entirely, but I'm not overly concerned for three reasons...
First, litigation like this takes years – even decades – to play out. So any impact is likely far into the future and spread out over a long period. Just look at how ExxonMobil (XOM) and BP (BP) bounced back after the Exxon Valdez and Deepwater Horizon oil spills.
Second, these cases will surely be appealed all the way to the Supreme Court, which has a strong pro-business majority. So I think it will be likely to rule in favor of the social media companies, for reasons outlined in this WSJ editorial:
Congress for years has debated legislation to protect teens online, including stronger parental controls and privacy settings. But lawmakers have punted because, well, it's easier to beat up Big Tech. Some Members also demand that any legislation include a right of private action that would let trial attorneys loot the companies...
The social-media shakedown is a victory for the plaintiffs bar – not for children or society.
I also think there are real parallels with a recent copyright battle over pirated music as reported by the New York Times. The Supreme Court decided in favor of Internet provider Cox Communications, limiting the liability for providers when their users download and share music illegally. (Here's the WSJ editorial on this ruling.)
Once the chattering about these cases fades, investors will once again focus on these social media companies' incredible business models, modestly valued stocks, and the many levers they're pulling to increase value.
I've written many times recently about why I think Alphabet will be the biggest winner in AI with Google Gemini and in autonomous vehicles with Waymo.
And according to this CNBC article, Meta is in the process of massively cutting its employee headcount, thanks in part to its investment in AI.
In summary, this week's verdicts haven't caused me to change my mind on META and GOOGL. They both remain compelling at today's prices.
2) One of the biggest mistakes investors make is overweighting dramatic recent news, information, or evidence...
For a good example, look no further than this NYT article from last week about the total debacle that was the metaverse:
Five years ago, Mark Zuckerberg proclaimed that the future of Facebook would be the metaverse. Based in virtual reality, it would be an immersive digital world where people could work, play and meet up, he said. To punctuate the point, Mr. Zuckerberg renamed his company Meta...
Even after Meta lost roughly $80 billion on its endeavor, the metaverse and virtual reality remain niche interests among hobbyists and some businesses. Other digital worlds, like Roblox and Fortnite, became more popular.
The article goes on to detail the company's missteps and miscalculations, which has resulted in almost nothing to show for its $80 billion investment.
This created a spectacular buying opportunity in late 2022, when the stock briefly fell below $90. But other than that? None of it mattered...
I analyzed this situation carefully in my November 3, 2022 e-mail. Investors were furious at CEO Mark Zuckerberg for what they saw as wildly excessive spending in an unproven area. But as others were running away, I stayed put for these reasons:
First, because I'm not willing to write off all of Meta's metaverse investment as a total waste. Zuckerberg knows a lot more about it than I do and I have no reason to believe he's irrational or stupid, so I'm open to the idea that tens of billions of dollars in spending in this area will create some valuable technologies...
Second, it's important to keep in mind that Meta's spending in this area is purely discretionary. At any time, Zuckerberg can decide to scale it back. I don't think this is likely – at least not in the next year – but it's possible, and it would be a big catalyst for the stock.
Lastly, I think the stock price more than reflects the consensus view that every penny Meta spends on the metaverse is a total waste. As the saying goes, "if it's in the headlines, it's in the stock price." In other words, if the spending on the metaverse continues to produce little value, I don't think it hurts the stock from here – but if there's any positive news, it could be a big driver of the stock.
Sure enough, Zuckerberg came to his senses, scaled back spending on the metaverse, and the stock took off. As you can see in the chart below, it has doubled in the past five years and is up more than 500% since its 2022 lows:
Investors did well by ignoring the negative headlines – but that's not always the case.
The key is to think independently and correctly differentiate between short-term/fixable problems and permanent/unfixable ones.
3) Many readers enjoyed the WSJ article I included in Friday's e-mail about a man who's a "car dealer's worst nightmare." The WSJ published a follow-up, in which he answered six questions from readers. Here's the first:
How big of a discount do you usually ask for at the start of a car negotiation?
A lot of people think that you should start high because you're going to meet them in the middle. But if you start really high, a dealership stops thinking you're realistic.
If you want a good rule of thumb, I say 7% to 10% off of MSRP [manufacturer's suggested retail price] is normal, minus any automaker incentives. That's the lowest a dealership will go. So I'd start right at my top number, and I know I might go down to 7% in the worst case, but I'm trying to get that 10% all day.
Like I said before, these are great lessons that can apply to much more than buying cars.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
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