State attorneys general went into that Oakland courtroom seeking around $200 billion from Meta…
Meta's own lawyers had reportedly war-gamed a worst case running past a trillion.
This was a watershed moment with echos of big tobacco lawsuits of the late 1990s that ultimately marked the beginning of the industry decline.
But on Wednesday, the 2 sides settled for $16.7 billion, payable over ten years.
If you've been reading me for a while, you'll know why I'm writing this one.
When I covered Meta's Q2 back in July, I laid out the bull case and then named the one thing that would shift my opinion.
It wasn’t the CAPEX or the Metaverse.
It was the lawsuits… and specifically the risk that Kentucky was the first domino and every state in the union would follow, big tobacco style.
That has now been resolved.
Spread across ten years, the settlement figure is roughly $1.7 billion a year. Meta makes that much money in about 3 days.
This is what the market was pricing as an existential threat.
Besides, Meta might not even have to pay that much… because around $5 billion of the payment is contingent on Google and TikTok adopting similar teen protections and making payments to the same states.
Will usage among teens decrease? Absolutely
Is that bad news for revenue? Sure, but less than you’d think.
Teens are not where the advertising $$$ come from… that’s 25-44 year olds.
But what we’re seeing is that litigation risk gets priced by headline, because a headline is a number a journalist can write down.
The number that determines what a lawsuit actually does to a business is the annual cash cost measured against annual cash generation. Those two numbers can differ by a factor of a hundred, and in this case they did.
I said in July that buying Meta at 22 times earnings was one of the best risk/reward setups in the market.
Well the risk side of that equation just got materially smaller, and the reward side hasn't changed.
Oliver