Meta faces US$310 billion market value drop on legal, AI concerns

The combination of upward revisions and a sinking share price have made Mark Zuckerberg's Meta the cheapest stock in the Magnificent Seven. Photo by Drew ANGERER/AFP via Getty Images

Article content

Article content

Shares of the Facebook and Instagram parent were down 18 per cent this month, putting them on pace for their worst performance since October 2022. That was when Meta gave a disappointing revenue outlook, and chief executive Mark Zuckerberg pleaded with investors to stay patient with the company’s ballooning spending on the metaverse.

Article content

Article content

Article content

Today, Meta is de-emphasizing the metaverse to focus on AI. But the concerns about runaway spending have only grown. And there’s a rising existential risk surrounding the company after a jury in New Mexico found that Meta misled teenagers in the state about the safety of its social networks, and Meta and Alphabet Inc. were found liable in a trial related to social-media addiction. The stock has lost US$310 billion in market capitalization in March alone.

Article content

Article content

Wall Street is now grappling with the possibility that social media companies could face a similar risk to the shrinking of the tobacco industry following stronger smoking regulations, though many say it is too early to tell.

Article content

“I don’t necessarily see this as the same as tobacco, but stranger things have happened,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, which has about US$11 billion in assets and owns Meta shares. He started his analyst career covering tobacco and spent a lot of time gaming out litigation risks.

Article content

Article content

“Some would say the only way to remove any negative impact of social media is if you shut the whole thing down,” Ghriskey said. “Obviously that would just devastate the company.”

Article content

Article content

The tobacco comparison is “the persistent question we have gotten from investors” in the wake of the verdict, Mark Mahaney, an analyst at Evercore ISI, wrote in a note to clients on March 26. “Is this Meta’s Big Tobacco moment? In other words, is Meta uninvestible today? It’s possible, but we think unlikely.”

Article content

Article content

Investors, however, appear less sure. The stock plunged in the wake of the rulings, falling to its worst week since October. Meta shares are down 32 per cent from their all-time high and dramatically lagging the Nasdaq 100 index this year. The stock rose 1.8 per cent on Monday.

Article content

That’s a sharp reversal from January, when the shares gained 8.5 per cent in a month and were among the 25 best performers in the tech-heavy benchmark. At the time, a robust sales forecast was considered a sign the company’s aggressive AI-related capital expenditures were paying off. Meta’s revenue is expected to grow about 25 per cent this year, up from last year’s 22 per cent pace.

Article content

However, a look at Meta’s free cash flow shows why investors are souring on exorbitant AI spending. Even with its revenues rising fast, free cash flow is expected to shrink 83 per cent this year to less than US$8 billion from US$46 billion in 2025. Meanwhile, its capex is projected to soar 77 per cent to US$123.5 billion this year and above US$140 billion in 2027. The company is cutting several hundred jobs amid the AI spending.