A ruling in Los Angeles Superior Court on Tuesday cast a long shadow over Wall Street, hitting the share prices of Meta, Reddit, and Snap with particular severity. The Nasdaq index fell 2.4%, while shares of these social media companies plummeted between 8% and 10% as the implications of Wednesday's verdict in a social media addiction lawsuit continued to reverberate. It is important to note that the ruling found Meta and Google's YouTube liable for negligence, but did not involve Snap or Reddit. Snap had reached a settlement prior to the trial, while Reddit was never part of the case.
However, investors appeared more concerned about the legal precedent set for the broader internet industry, particularly smaller firms. Jennifer Huddleston, a technology policy senior research fellow at the Cato Institute, commented on The Information's TITV program, stating, "This is an incredibly broad ruling that has implications not just for the two companies involved, but for the social media industry as a whole."
The verdict strips internet companies of the long-held liability shield protecting them from legal responsibility for content posted by users on their platforms. This has created an unsettling overhang for investors in the sector. If anyone can sue an internet company over content seen on a website, where does it end? (Artificial intelligence companies are not immune from this dynamic either.)
The most immediate consequence is that Meta, YouTube, and Snap now face thousands of additional addiction-related lawsuits queued up for trial following Wednesday's decision. As previously reported, this first case was expected to set a benchmark for potential global mass settlements. Nevertheless, the entire process is likely to be protracted. It is certain that the tech companies will appeal, and the possibility remains that they could achieve a more favorable outcome in appellate courts.
Analyst Barton Crockett from Rosenblatt Securities noted in a Thursday report that tech companies have a strong chance of having the decision overturned or the scope of liability narrowed on appeal. He stated that appellate courts are "likely to be more sympathetic to social media companies," especially concerning the applicability of Section 230 of the Communications Decency Act as a defense.
In the interim, these stocks are likely to remain under pressure due to potential legal liabilities. This is particularly bad news for Meta's shareholders—the company was already out of favor on Wall Street due to its massive investments in artificial intelligence. After Thursday's sell-off, Meta's stock is down 17% for the year, making it one of the worst performers among large-cap tech stocks, second only to Microsoft (which is weighed down by concerns over its software-as-a-service model and AI spending). Google's stock fell 3.4% on Thursday, experiencing a relatively smaller impact because YouTube is less central to its core business than social media is to Meta or Snap.
Meta possesses sufficient financial resources to endure years of litigation—it held $80 billion in cash and investments as of December 31st, and could free up more capital by scaling back AI investments. Smaller tech companies, however, lack such resources. Snap, the parent company of Snapchat, faces other legal challenges beyond the addiction lawsuits. For instance, on Wednesday, the European Commission announced an investigation into whether Snapchat complies with child online safety regulations.
While Snap is not a small company, its financial strength pales in comparison to Meta's. As of December 31st, Snap held only $2.9 billion in cash and investments, and its free cash flow before capital expenditures was $656 million last year.
Snap's outlook was already clouded by slow advertising revenue growth and a shrinking user base in North America. Its shares closed at a record low of $4.01 on Thursday, giving the company a market capitalization of just $6.8 billion. Snap CEO Evan Spiegel may soon regret the decision to remain an independent company.
In other news related to Meta's AI investments, the social media giant announced it is increasing its investment in a data center in El Paso, Texas, from the $1.5 billion announced last October to over $10 billion. The reason for this significant increase is not entirely clear, though the company initially stated the facility had the "ability to scale to 1 gigawatt" of capacity, an energy requirement roughly equivalent to powering a mid-sized city. On Thursday, Meta confirmed the facility "will scale to 1 gigawatt."
Other industry updates include an OpenAI spokesperson revealing that the ChatGPT advertising business reached an annualized revenue run-rate of $100 million just six weeks after its pilot launch. According to the Financial Times, OpenAI has indefinitely shelved plans to allow ChatGPT to generate pornographic content. A consortium including BlackRock and UAE's MGX has acquired data center developer Aligned Data Center, which raised $2.6 billion in debt financing to expand AI computing facilities in the US. Gadi Hutt, Product and Customer Engineering Director for Amazon's server chip design unit, Annapurna Labs, has departed. Apple is opening up interfaces to allow other AI assistants to integrate directly with Siri, a change reportedly accompanying a major Siri overhaul to be announced at June's Worldwide Developers Conference. Finally, Elon Musk's X platform has reportedly laid off its chief marketing officer and over 20 non-engineering staff in recent weeks, while bringing on Musk's long-time investor and ally, Jon Schulkin, as chief revenue officer in an effort to boost platform income.
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